Why the bulls leaped for the bandwagon

It started two weeks ago in a paneled committee room in Washington with a few encouraging words by Federal Reserve chief Paul Volcker. Then came the economic data. Then a stronger bond market. Then, boom!

Five points, 19 points, 31 points, 36 points were strapped onto the Dow Jones industrial average last week like Olympic gold getting hung around the necks of American athletes.

If, amid the confetti and the bubbling optimism, you could distill the ''conventional wisdom'' of the more bullish investors and advisers over the past two weeks, it would go as follows:

Economy strong - but not too strong. Little pressure on wages and prices, so little worry about inflation. Plus it's late in the recovery, so no good reason for interest rates to rise. Government bond prices peaking. Hmmmm. Only place for real appreciation is stocks. Which stocks? Something good: blue chips, interest-sensitive stocks. As these get pricey, maybe something riskier ... maybe anything....

Such is the ''groupthink'' that appears to have spurred the stock market in recent days. The weekend will have passed by the time you read this. That may have brought enough sober reflection among investors to cause them to begin cooling somewhat and asking why, in fact, the market should go much higher - perhaps even prompting them to take some profits while the going is good.

Nevertheless, a sea change of thinking appears to have occurred, and it will take a good deal of naysaying and of negative economic data (negative, at least, to investors) to turn the market bearish once again. Depending on whom you listen to, this is either a resumption of the August 1982 bull market, the much-heralded summer rally, an election-year rally - or a flash in the pan.

For the record: The Dow Jones industrial average had a banner week, closing Friday at 1,202.08, up a record 87.46 points since July 27. Volume on Thursday and again on Friday (a record 273 million shares) indicated heavy participation in the rally by large institutional investors, such as pension and mutual funds. Non-blue chips moved up as well, indicating the rally was broadly based.

Technical analyst Larry Wachtel of the Prudential-Bache brokerage points out that it is folly to try to dissect intellectually what has been happening on the Street.

''The market is an emotional caldron,'' he contends. ''The guy with the $5 billion portfolio is as emotional as the guy on the street. He sees his brethren getting aboard, and if he's going to be left in the dust he's got to have very impressive reasons why.''

Although he refers to the wild spree - especially the Friday version - as ''absurd emotional buying,'' he nevertheless says Prudential-Bache ''can't get in the way of a moving freight train'' and so it is bullish as well.

David M. Kalman, a technical analyst with W. H. Newbold's Son & Co. of Philadelphia, had been among several market-watchers who predicted the rally. He expects it to continue for 12 to 14 weeks because of ''heavy buying pressure from institutional portfolio managers whose performances have been disappointing over the past six months.''

One such institutional money manager is Thomas Williams, an equity strategist with Kemper Financial of Chicago. His firm participated in the heavy buying Thursday, though it remained aloof Friday.

''Consensus economic opinion has been changing,'' Mr. Williams says. ''It can best be described today as 'stronger longer.' There is a 1985 and it's probably not too bad.''

Not everyone was on the bandwagon - but you had to look hard to find that odd soul. If you are a bull, lack of unanimity is just as well, since Wall Street lore says bull markets have to be disbelieved for them to go higher. Then, according to this view, disbelievers slowly lose their reticence and jump in, and that fuels the climb even more.

If you are a bear - or a fence-sitter - this market might be seen as a ''bear trap'' that lures unwary investors into it before the eight-month down-leg resumes. Joesph Bartell of Butcher & Singer contends that institutional cash to fuel a big advance is not nearly as high as when the bull market began. This, he warns, is ''a spectacular election-year rally that will prove disappointing'' and in three months ''the market will reach new lows.''

E. F. Hutton's chief researcher, Newton Zinder, was encouraged by last week's action on Wall Street but was still cautious. He admits there has been a ''complete change of perception'' among big investors that interest rates have peaked, but he notes that ''a lot of people are staying clear'' of the market.

Still, Mr. Zinder finds the best investments today in interest-rate-sensitive stocks - those that have been battered by the 13-month increase in interest rates. These include financial institutions (banks and savings-and-loans), utilities (electric companies without nuclear construction woes and the telephone operating companies), the consumer group (retailers and airlines), and ever-popular big names such as IBM.

Some see fundamental economic reasons behind the boom. Orest Pokladok, financial economist with Moody's Investors Service, contends that the underlying reason for strength in the bond and stock markets is the uniquely healthy profile of the US economic recovery.

''We have had a vigorous recovery without inflationary pressure,'' Mr. Pokladok says. ''The Fed has been able to maintain an essentially neutral position. It appears to have been a fundamentally based recovery without inflationary pressures. This is because the recession that preceded it was more fundamental in nature. There were a lot of shakeouts in heavy industry, a lot of emphasis on trimming fat and upgrading efficiency. Productivity rose rapidly and has remained high - especially high for this late in a recovery.''

The American economic machine, he observes, is working smoothly. Wall Street seems to buy that view.

Interest rates. Percent Prime rate 13.00 Discount rate 9.00 Federal funds 11.50 3-Mo. Treasury bills 10.89 6-Mo. Treasury bills 10.38 7-Yr. Treasury notes 12.58 30-Yr. Treasury bonds 12.51 Source: Bank of Boston

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