Upward interest vs. Dauntless bulls

Interest rates are beginning to move back up again, giving investors second thoughts about the direction of the stock market. Behind the interest rate rise, notes Lawrence A. Kudlow, chief economist at Bear, Stearns & Co., is a marked increase in government borrowing. During the fourth fiscal quarter, which for the government is July through September 1980, "the government is expected to raise approximately $28 billion in new cash," he says.

In the next fiscal year, starting this fall, the borrowing could be even heavier with a tax cut. Mr. Kudlow estimates that if Congress enacted a $30 billion cut, the budget deficit could widen to $78 billion. He concludes that with some $18.7 billion in off-budget financing necessary as well, the government would need $97 billion in new cash next year. Including roll-overs of existing debt, which totals $505 billion, the government would be borrowing $ 602 billion.

The federal government is not the only major borrower. William C. Melton, an economist for Irving Trust Company, notes that in June a record number of corporate borrowers entered the financial markets. And, he says, "the continued robustness of the calendar augurs for the pressure to be maintained in the immediate future."

An added pressure on the bond markets was the Federal Reserve Board's inability to get a handle on the money supply. In the last four weeks the supply has grown 13.6 percent on an annual basis. Eileen Spinner of Smith Barney, Harris Upham & Co. says such growth was "disheartening" to investors.

Faced with this kind of pressure in the bond markets, investors are beginning to waver on the trend of the market. This was evident last week as the Dow Jones industrial average lost 5 points the first three days, before surging 12. 89 in a traditional Fourth of July rally on Thursday, the last day of trading in the holiday-shortened week. For the week, the Dow gained 7.08, closing at 888. 91.

William M. LeFevre, and analyst with Purcell Graham & Co., says it is normal for investors to worry about the stock market during bull markets.In fact, he says that "probably back around the Spanish-American War some early Wall Street market-letter writer coined the phrase, "Every bull market climbs a wall of worry.'" This bull market, he concludes, is no different.

Oppenheimer & Co. also finds itself sitting with the bulls. Stefan D. Abrams , chairman of the stock selection committee, says the large broker figures that the deepening recession will ring panic alarms in Washington. This in turn will produce one last monetary stimulus, dropping interest rates even further. Thus, the committee concludes, "the economic trough now seems to be approaching much faster than most observers, including ourselves, had been expecting earlier."

Mr. Abrams says the implication for investors is that there will be a shift from credit-sensitive and dependable growth companies to more cyclically sensitive stocks by this fall. Oppenheimer is telling its clients that "retail stocks tend to perform in anticipation of an earnings recovery" and it might be time to buy some retail stocks, which are cyclically sensitive.Analyst Terence McEvoy recommends buying Carter Hawley Hale, K Mart, and Zayre as well as Color Tile, Morse Shoe, and Tandy Corporation, three specialty retailers.

In the market last week, airlines, conglomerates, and oil stocks were stronger.