Wall Streeters expect the rally to defy gravity awhile longer

Will the trees soon touch the sky? Or in the oft-repeated words of kids in the back seat of a station wagon: ``Are we there yet?''

Naturalists reply, ``Of course, trees don't grow to the sky.'' And parents respond, ``Soon, dears, soon.''

Those answers may be adequate for children and they even seemed sufficient for investors back on Dec. 11, when the Dow Jones industrial average reached the heady height of 1,500.

But then the Dow leaped over 1,600 on Feb. 6. And last week it vaulted to a record-shattering 1,700, just 14 trading sessions later. Now we're beyond thumbnail aphorisms. And even Big Blue's traditional role as the leader of the Dow pack is being called into question.

Analysts are saying IBM's new computers aren't so hot. The company is blaming a sluggish economy. At any rate, IBM's earnings estimates are coming down.

And when the price of IBM stock falls during a two-month period while the industrials chalk up an 11 percent gain, that's enough to send Wall Street off to do some serious rechecking on Newton's gravitation theory.

The formula for the stock market, it seems, is to establish a positive correlation with the bond market. Since the first week in February, long-term bond prices have shot up more than $100 for every $1,000 of face value.

Or, put another way, yields on 30-year Treasury bonds have fallen from about 9.3 percent to 8.3 percent in the last three weeks -- the lowest level since '78.

The rationale behind rising bond prices? Sliding oil prices have reduced the inflation outlook.

Since inflation will take a smaller bite out of the real return on long-term bonds, they are a more attractive investment now.

Last week's rise was predicated on speculation that the Federal Reserve would soon cut interest rates. (Sound familiar?) That assumption arose out of rumors that Japan and West Germany will soon lower interest rates to spur their economies.

And as yields on bonds continue to shrink, more and more investors turn to the stock market for potentially greater returns. By last Friday, the Dow closed at 1,709.06, up 11.35 points in heavy trading throughout the week.

Right on schedule, according to Gene Jay Seagle. In mid-January, Mr. Seagle, director of technical analysis at Gruntal & Co., forecast on this page that the Dow, which was sliding at the time, would not dip below 1,500 -- and that it would eventually hit 1,700 by March. He also predicted the Dow would tumble to 1,450 before a rebound at year-end to around 1,700.

From the back of the investor's bandwagon comes the query: ``Mr. Seagle, are we there yet?''

Says Seagle: ``This market has incredible momentum. It's very difficult to break this psychological momentum. There's a lot of money still pushing to get in as soon as the market starts to correct.'' But he does expect the Dow pace to slow. ``We'll get pretty close to 1,800. I expect an important correction starting around the end of March.''

Seagle believes the market will shave 10 percent off its top, falling to between 1,580 and 1,600 before moving ahead again later in the year.

``I don't expect to see a serious major bear market, the kind [that] one normally expects at the end of the fourth year in a bull cycle,'' he says. And, with remarkable understatement, he adds, ``This market has a character we've never seen before.''

Seagle and several other market analysts say a sizable influx of cash to buy stocks is coming from money market funds and new investments in individual retirement accounts (IRAs). In fact, mutual funds and brokerage firms are reporting that IRA investments are up 25 to 50 percent over last year at this time.

Perhaps it's true that the cash is leaving low-yielding money market funds for stocks. But whether IRA money is directly boosting stock prices, or will do so, is a more difficult conclusion to draw.

Investors are very cautious with retirement money. They tend to put most, if not all, into conservative investments.

That is why bank certificates of deposit have gotten the lion's share of IRA money up to now. Now, lower CD yields mean that as much as one-third of bank CD IRA accounts may be shifting toward mutual funds.

But most of that money is going into ``safe'' bond funds, not equities.

The IRA Reporter, a Cleveland publication, estimates that some $40 billion to $45 billion in new money will flow into IRA accounts this year. Even if all of that money went into stocks (which isn't likely), that new money represents a minuscule proportion of the total market capitalization.

Still, there may be an opportunty based on even a small amount of IRA equity buying. IRA money going into equities this year (and in years to come) will probably seek out companies with long-term growth records and high dividend yields.

Electric utilities tend to fit that profile. A number of brokerages -- including Dean Witter Reynolds; Piper, Jaffray & Hopwood; and Advest Inc. -- are recommending utility companies for this reason.