The shifting of gears going on in the financial markets hasn't been butter smooth lately. Through most of the last six months, until May, bonds have led stocks on a high-speed, highly profitable chase. Then bonds skidded into the pits and now stocks are left careening on an uncertain track.
This past week, the Dow Jones industrial average posted an 11.71-point loss, closing at 1,874.19. In a buying surge on Friday, investors in the blue-chip issues overcame qualms, and the Dow regained most of the record 45.75 points lost on Monday.
Buyers of over-the-counter stocks took a less volatile course, pushing prices steadily higher. In fact, so far this year the NASDAQ composite index is up 22 percent, outpacing the Dow's 19 percent run-up.
Among the big movers last week: Financial News Network, Horn & Hardart, and a stock called C.O.M.B. FNN's price doubled on reports it is considering going into the cable-TV telemarketing business.
The excitement stems from the meteoric debut of Home Shopping Network, a lucrative telemarketer. It went public at $18 a share last month and now trades at about $75.
But such euphoria passed by the more economically sensitive Dow stocks. At the heart of last week's concerns: refinancing Mexico's heavy debt and getting a reading on a United States economy that's offering no outright assurances that it might be upshifting or downshifting.
That has kept investors wondering: Is the equity market going to be driven by falling interest rates or by an upturn in corporate earnings?
Last week's unexpectedly weak retail sales figures for May bolstered the lower-interest-rate theory. Market strategist John D. Connolly of Dean Witter Reynolds expects events outside the US to provide the leeway for lower rates here.
The none-too-robust economies of Europe and Japan, coupled with pending elections in both Germany and Japan, could provide the political incentive for central banks to drop interest rates to spur business activity.
Morgan Stanley & Co.'s Byron R. Wien, who has just returned from London, Vienna, and Florence, says European investment bankers have similar expectations for lower rates.
But until such things begin to quietly mesh, several financial forecasters are taking refuge in cash.
For the first time in six months, E. F. Hutton & Co. recently went from zero to 10 percent cash in its model portfolio (60 percent equities, 30 percent bonds). Hutton is recommending lightening up on interest-rate-sensitive stocks.
Another member of the yellow-flag club, newsletter maven Howard Ruff, states in a recent issue that ``this bull market has one more leg up, but after a massive, overdue correction.''
Using his charts of moving averages, Ruff figures a 200- to 300-point drop in the Dow ought to be adequate.
Ricky Harrington finds that a bit overdone for his technical tastes. ``My worst case is a fall to 1,750 to 1,800,'' says Mr. Harrington, director of analysis at Interstate Securities in Charlotte, N.C. ``We'll resume the upswing later this summer, perhaps as soon as later this month. I think we're likely to do 2,200 to 2,300 in the next six months.''
Brave words in the face of negative technical signs. Last week, bears let out an approving growl when new lows on the NYSE exceeded the number of new highs for the first time this year.
New issue-volume that is fast approaching record heights also strikes many as a warning signal. And the Dow utility and transport indexes failed to reach new highs when the Dow industrials did on June 6 -- another portent of down markets to come, Dow market theorists say.
But Harrington remains sanguine. ``This is simply a bull-market correction that's nearly over. More important than those `mechanical' indicators are the sentiment and liquidity indicators.''
He looks at the $225 billion invested in money market funds and the rising number of investors turning sour on stocks.
Harrington reasons: ``Everybody's nervous. Everybody's looking for a decline, so it's less likely to happen.''
Far from Wall Street's cement canyons, Michael W. Lamb's attention is not centered on the broad machinations of the market. Rather, this Kansas City-based investment adviser is tracking, as Mr. Lamb dubs them, the ``power investors.''
Through Securities and Exchange Commission filings and the grapevine, he shadows trades of some two dozen proven stock pickers, including Warren Buffett, Ivan Boesky, the Bass brothers, and Irwin Jacobs.
Mr. Lamb, a former PaineWebber broker, doesn't follow in lock step, preferring to do his own research before making his move. ``We ask ourselves two questions before buying,'' he says. ``Why did they make that purchase, and why now?''
Because of the lag between, say, a Bass brothers buy and when the SEC data become public, Lamb sometimes finds the price has become too rich for him to follow suit immediately. But on the sell side, Lamb follows his model investors strictly.
The performance record of his Wealth Monitors newsletter is short but impressive. Lamb says that out of 18 stocks bought and sold since January 1985, 16 were profitable, one broke even, and one lost money.
Lamb claims a 44 percent annualized gain. Last month he founded a mutual fund under the Wealth Monitor name.
``People say, `It sounds so simple,' '' he says. ``It is. We have inherent in our beliefs that something has to be complicated to be successful.''
The method works, he says, because ``the people we follow cause things to happen. They're not passive. The average investor does his research, invests, and hopes and waits. These guys can and do tell management what to do.''
Lately, Lamb concedes, the pickings have been thinning out. The corporate-takeover kings have grown quiescent. Last month, Warren Buffett told Berkshire Hathaway shareholders flatly: There are no bargains in this market.
Still, Lamb remains enthusiastic about several issues, including a thinly traded, speculative OTC stock: Southland Financial.
Arbitrageur Ivan Boesky owns nearly 10 percent of this Dallas-area real estate developer, which holds 12,000 acres of land. Lamb says Boesky bought his stake at an average price of $32 a share.
Southland Financial, he says, is now trading at about $20. Recently, Boesky turned down an offer for more than $32 a share, Lamb says.
Two recent appraisals, he says, show the land Southland Financial bought in 1929 is worth enough so that the stock could be valued at $60 a share.
It is such smart-money deals that Lamb finds attractive.