Stocks climbing into turbulence?

Who would have thought it? Except for some modest dips in recent days, the stock market has been on a generally upward course since October's market plunge; experts say this mirrors the underlying strength in the United States economy.

But not a few Wall Street analysts remain cautious, saying the market could get worse before it gets better later this year or in 1989.

For the first half of the year, the market has looked very impressive, rising 10.5 percent. The biggest part of that gain - 7.7 percent - came in the second quarter, ended June 30. But much of that gain represented mergers and acquisitions, or at least institutional investment. Small investors have yet to return to the market in force since the market plummeted 508 points in October.

Where do stocks go from here? And what elements should be watched by any investor bold enough to commit funds to this market, given its recent turbulence and volatility?

``The pattern since Memorial Day has been sporadic,'' says Larry Wachtel, an analyst with Prudential-Bache Securities. ``The market will take two steps forward, and then fall back a step. Nothing seems sustainable.'' Still, Mr. Wachtel believes the market will ``move upward, to the 2,200 level. By Labor Day, it should be approaching 2,300.'' If it does drop, he says, the fall would not be dramatic.

``Sometime this summer, possibly by Labor Day, the market could go as high as 2,400,'' says Monte Gordon, director of research at the Dreyfus Corporation. The reason, he believes, relates to the overall strength in the US economy and increasing perceptions that inflation may not be as bad later this year as some analysts suggest.

``The US will avoid a recession this year and possibly even in 1989,'' Mr. Gordon says. So if growth slows somewhat, as it appears could be happening, there is no reason the market will not continue to advance, he says. But ``there could be some retracing later in the year, after the market reaches the 2,400 range,'' he adds.

Still, some analysts - and, at least publicly, they continue to be in a minority - believe the market could soon be in for some unhappiness. Susan Berge Kent, first vice-president at Tucker Anthony Investment Research, in Providence, R.I., believes that if the market does not get back up over 2,150 by today,wed it could ``collapse'' sometime not too far off.

The Dow Jones industrial average closed up 5.16 points Monday, to 2,111.31. The post-October high, on July 5, was 2,158.61.

Ms. Kent, however, admits to concerns about the market's apparent strength. ``Our technical work indicates a tremendous lack of momentum in the market since April,'' she says.

``From a philosophical point of view, nothing has changed in the economy,'' Kent says. ``Nothing has been done about the budget deficit, corporate debt, consumer debt, the merchandise trade deficit.'' Until these issues are resolved, she says, the market is not going to rally much.

If the market does drop, it could quickly fall 300 to 400 points, she says.

Ricky Harrington, a technical analyst with Interstate Securities Corporation, in Charlotte, N.C., is only slightly more upbeat. He believes that the market's current upside range is between 2,200 and 2,230. ``Any move below 2,075 would constitute a breakdown,'' with the danger of a slide, he says.

Mr. Harrington believes that the current market is not so much a bull market as a ``technical rally in the ongoing bear market'' that began in October. Nor is he impressed with the strong showing of secondary stocks, which, in the first half of this year, outperformed their blue chip brethren by roughly 2 to 1. ``That was also the case back in 1929,'' Harrington says. ``People forget now, but secondaries performed very well in that [1929-30] market.''

Harrington is especially concerned over a possible downturn in Japan's market, since the capitalization in the Tokyo Stock Exchange accounts for about ``42 percent of the the world's stock value, while the US market represents about 32 percent.''

Still, the type of concern expressed by Harrington tends to be dismissed by most major investment houses and a Wall Street trading community that, by and large, sees the current investment pattern continuing into the rest of the summer.

What should investors, particularly smaller individual investors, look for in attempting to assess the course of the market?

PruBache's Wachtel points to three signals:

Second-quarter earnings reports. Due over the next two to three weeks, these reports should be watched for the direction and size of any profits or losses, and for the trading sectors involved.

The response to those earnings from Wall Street. ``Good news usually sends the market higher.'' But, he also notes, if the response to even good news is negative, that suggests a lack of confidence on the Street.

Actions, if any, taken on inflation by the Federal Reserve Board. Again, how do market professionals regard the Fed actions - or lack of action?

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