To gauge the market, watch 'Big Blue.'

If you want to gauge the market, the bellwether is ''Big Blue'' - IBM. So says John Connolly, vice-president of the Dean Witter Reynolds brokerage. IBM has the largest capitalization of any company in the world. IBM is the single biggest factor in the two most popular market monitors, the Dow Jones average price of 30 industrial stocks (IBM makes up 8.2 percent) and Standard & Poor's capitalization-weighted composite index of 500 stocks (IBM accounts for 5 .9 percent).

''IBM price movement,'' Mr. Connolly notes, ''is the bellwether for the market and for technological stocks.''

Failure of IBM to improve on good news at the first of the year signaled trouble for the market as a whole. Both IBM and the market have fallen about 13 percent since early January. At $130 a share earlier this year, IBM was overpriced, Connolly says.

But now, around $105, IBM's ''downside risk'' is low - especially considering IBM's growth potential of 16 percent a year and current yield of 3.6 percent, making its total return around 20 percent. This, Connolly notes, is twice the return on US Treasury bills.

''If IBM firms,'' Connolly says, ''then we might push out the frontiers of risk a little bit into other technology stocks.''

Early last week, IBM began to climb; the market rallied also. The Dow rose 44 .74 points in its first three sessions.

When IBM plateaued, the market leveled off, too. IBM closed Friday at $105.25 , and the Dow at 1,131.07, up 44.17 points since June 15, recovering virtually all its loss from the week before.

Volume during much of the week was high, indicating to some analysts that institutional investors such as pension funds were willing to buy into the stock market after a several-month hiatus. Although some of that activity might have be traced back to the institutional investors' habit of portfolio switching before the end the quarter, there still appeared to be a modicum of faith in the rally that began June 18.

Whether that faith grows appears to depend very much on the future of the bond market, which is linked closely to the stock market. If interest rates level off and the bond market consequently stages a rally, the price-to-earnings ratios of stocks would be greatly helped.

That bond market rally, market watchers say, can come only if interest rates peak and perhaps retreat. Because the nation's money supply has been expanding, however, the Federal Reserve is not likely to allow the kind of even-keel money growth necessary to meet the high credit demands of corporations, consumers, and the federal government without driving up interest rates. The money supply rose January.

Connolly figures the Fed will try to bring the money supply back into line, perhaps achieving this by late July or early August. Thus he sees the much-predicted stock market rally as occurring in late summer or early fall.

The way to detect a bond-market rally, he says, is to watch longer-term bonds to see if investors are beginning to snap them up. At this point a two-year Treasury bill yields more than 13 percent a year. Over its life, then, it brings in 26-plus percent. With inflation running at 4-6 percent a year, that means in two years you will have achieved about a 16 percent return on your capital.

''That's a deal,'' Connolly says, assuming you are in a tax-free category, as individual retirement accounts are. And the investment is tied down for only two years.

If investors are confident that inflation will remain low, he says, then they should begin trying to lock in those kinds of yields for more than two years. Thus they will go after longer-term bonds. The next logical step after that, he says, would be to move back into stocks in a big way, since investors in stocks are looking for long-term capital gains.

Such a scenerio depends on no real outside surprises, however. Yet there are plenty of areas from which surprises can emerge: the international debt situation and its link with the soundness of American banks; public and private sector credit demands; the political campaign.

Financial economist Paul W. Boltz of the T. Rowe Price Associates mutual fund family in Baltimore worries about what he considers a ''doomsday scenerio'' tied to federal budget deficits. His concern is that Congress and the White House may drag their feet in reducing the $200 billion deficit until late 1985, by which time a recession might occur.

A recession, in turn, could force the deficit up to around $300 billion. Ultimately, intense pressure would grow to bring down interest rates - and the only means left would be by printing money. Then inflation would be up and running.

''To be sure,'' Dr. Boltz notes, ''more optimistic futures can be imagined. Congress may act decisively if voters can communicate a clear enough message to Washington (on budget deficits). But neither political party wants to advertise just how difficult the choices are.''

He notes that the solution to the deficit problem is not a simple one. Merely cutting defense spending, he says, could not really fund the ''runaway growth of medicare and interest payments.'' Taxing the upper-income group would result in only a minimal revenue gain.

''Somewhere along the line,'' this economist notes, ''the middle class will pay more taxes and get less government benefits. The deficit is too large and interest payments growing too fast for any less painful solutions.''

The November election and events leading up to it introduce a high degree of uncertainity for investors, observes Gred A. Smith, research director of the Prudential-Bache brokerage.

The best investment strategy in this kind of market, Smith says, is to remain diversified in (1) cash with returns close to 11 percent, (2) convertible securities, and (3) covered option strategies. In the stock portion of one's portfolio, he says, one should try to achieve returns well above the 4.5 percent yield of the stock market.

Although Smith concurs there could be a technical rally this summer, he says the stock market probably will not hit its ''ultimate low'' until this fall.

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