Was it the news from Washington? The technical blips on Wall Street charts? Or the foretaste of spring? Whichever it was, the clouds lifted on Wall Street last week, and the blue skies of economic recovery - once obscured by worries over the federal budget deficit, inflation, interest rates - again became apparent. After posting small gains in each of its trading sessions, Wall Street flowered into a major rally Friday, with the Dow Jones industrial average surging 16.96 points that day.
Government data, on balance, last week indicated the economy is performing well. From Washington came news that the White House and Republican leaders were ready to trim defense spending and bring down the budget deficit. Federal Reserve money-supply figures showed an encouraging decline, damping fears of tighter credit to curb inflation. The DJIA closed Friday at 1184.36, up 44.60 points for the week.
But it is still too early in the rally for many market watchers to throw caution to the wind. The Fed's anti-inflation policy has been well articulated by chairman Paul Volcker, and this week's money supply figure could as easily show an inflationary gain as last week's showed a decline. Moreover, since partisan politics in Washington intensify in an election year, the trimming of the budget is not guaranteed until the agreement is signed and implemented.
Optimism, tempered with a belief that the market is volatile, is how some technical analysts see things.
Anne E. Gregory, publisher of the Merrill Lynch Market Letter, observes that there are many positive indicators to be found. Profits of Standard & Poor's 400 top industrial companies, she says, should be up strongly by year's end. The daily advance/decline ratio has turned bullish. And investment advisory services have become highly bearish - which she sees in a contrary light as indicating bullishness. In studying 11 market corrections since 1950, she notes that each has shown an average 10.6 percent decline; the most recent one, she says, has been a bit longer and deeper than average, but it, too, may have bottomed.
Her recommendations at this point are that investors choose ''the better grade of big blue-chip stocks.'' She favors sectors such as consumer growth (Coca-Cola, Colgate-Palmolive), capital goods (Clark Equipment, Dover), and financial services (Barnett Banks of Florida).
Despite the recent improvement in the market, analysts, professional money managers, and individual investors do not feel quite confident enough to say with any assurance that the market is going to break out on a sustained rise. The nine-month ''correction'' of the bull market that began in August 1982 - and especially the sharp six-week drop between early January and late February - reinforced a need for caution. Robert Wibblesman, chief analyst of Cantor Fitzgerald & Co. of Beverly Hills, Calif., urges this course of action: With long-term investments, be prepared to ride out some periods of poor stock performance - ''After all,'' he says, ''you're a partner with the company.'' But program in stop-loss parameters that allow brokers to sell stocks if they slip to a certain level.
Mr. Wibblesman admits his recommendation makes an investor into more of a trader, especially in a down market, but he thinks the market has undergone a structural change that makes it more volatile. He traces this new volatility to the proliferation of institutional money managers and their need to outperform market gauges such as Standard & Poor's 500 in order to keep their clients. Wibblesman's choices of investments include those tied into capital spending (aluminum company stocks, for instance), conglomerates such as Gulf & Western, and selected technology issues (Data General).