Is It More Than a Market `Correction'?

THE bulls and bears are vying for control of Wall Street, as the ``hang on to your hat'' market turbulence of recent weeks underscores. Who wins will influence the shape of financial markets for months - and possibly years - to come.

To Wall Street, ``bulls'' are revered creatures. The United States has been in a bull market since October 1990, with stock prices rampaging upward. But since hitting a high of 3978.36 points on the Dow Jones industrial average Jan. 31, the market has been on a roller-coaster ride, skidding downward one day, rising another day, with the Dow falling around 10 percent and shedding billions of dollars in value.

Rising interest rates, concern about greater inflation, the Whitewater controversy, and political uncertainties abroad have spooked the market.

Is the stock market entering a bear market - a severe loss of 20 percent or more in share values? Or is this just a ``correction'' -

a modest dip of 10 to 15 percent in market values? The consensus among market analysts seems to suggest a correction. Economic fundamentals remain good. But only time will tell.

Fortunes and power are at stake. The financial world of the 1990s is increasingly complex and electronically interlinked. The stock markets face tough competition for investor money from the bond market, banks and other financial institutions, commodities markets, and specialized trading systems featuring exotic financial instruments that even the wizards of Wall Street do not always understand.

In the US, small investors have returned to the stock market following the crash of 1987, in large part through mutual funds. Such funds now hold assets of more than $2 trillion. American investors are also diversifying into overseas stocks. Foreign stocks are popular because they often bring higher returns and because scores of US stocks continue to disappear through company takeovers and mergers. The very diversity of financial markets promotes turbulence. Hang on! Taming the market's wild swings

ALTHOUGH the US stock market has fallen about 10 percent since late January, it has done so without the one-day mega-meltdowns of earlier downturns. On Oct. 29, 1929, the Dow Jones industrial average lost 30 points, plummeting 13 percent, with the market losing more than $14 billion in value. On Oct. 19, 1987, the market fell 508 points, a decline of almost 23 percent, or $500 billion in value.

Thanks to several new ``circuit breakers,'' required by federal regulators after the 1987 crash, automated trading is restricted, for example, if the market falls more than 50 points during a day. Additional trading restrictions can be brought into play if the market tumbles further. For small investors, that means the market is now less likely to swing wildly as a result of sell-offs.

But risks remain. Many stocks are still overvalued. Stocks are also linked to the booming ``derivatives'' market, which is largely beyond the reach of regulators.

Derivatives are high-tech, esoteric financial instruments that include swaps, futures, and options. They are often tied to stocks, bonds, currencies, and commodities. Trillions of dollars of assets - including savings that have been deposited in banks, mutual funds, and other financial institutions - are invested in a wide array of these new instruments.

The concern is that a bust in one area, such as hedge funds, could damage other financial markets.

Regulators are now asking banks to disclose their investments in such esoteric products. And many financial experts say Congress needs to enact legislation to bring derivatives under tighter federal oversight. Dow index is often too revered

JUST because the Dow Jones industrial average falls over time does not necessarily mean the entire US stock market is heading south.

The Dow may be the world's most famous market indicator, but it comprises only 30 large industrial stocks. The Standard & Poor's 500 index follows the ups and downs of 500 large company stocks. Price fluctuations in one or two Dow stocks can significantly influence the average.

The S&P 500 index better reflects the larger market, partly because of the number of stocks measured, and partly because it includes the stocks' total value. This gives larger corporations more weight.

The result? The Dow and the S&P 500 can diverge as they did last year. In 1993 the increase in the Dow was about 6 percentage points above that of the S&P 500. Dow stocks represent a narrow ``blue chip'' slice of the nation's industry. S&P 500 stocks are more long-term growth-oriented. Low interest rates helped spur expansion for many big companies last year. Yet many parts of the US economy faced slow growth, which worked against S&P 500 stocks.

This year, although interest rates are rising, the economy is growing faster. Will that favor S&P 500 stocks?

Other broad indexes - such as the NASDAQ Composite Index, the NYSE Composite Index, and the Wilshire 5000 Index - also help gauge market direction. When most indexes move down together and stay down for a while, this is a market ``correction.'' When one or two indexes turn upward, that can mean the end of a correction.