Bad news spooks market moderately

The underlying strength of the bull market carried the market through a period of bad news last week - until the last trading session. Despite the sort of events that usually make investors apprehensive - tragedy in the Middle East and the invasion in Grenada - the market posted only moderate losses most of the week. But as the week closed, pessimism apparently shook investors and the market plunged 18 points in one day, closing at 1,223.48, down 25.40 for the week.

Beyond the daily gyrations, however, analysts have been remarking on the fundamental strength of the market. The prime determinants of the Dow on a longer term basis, they argue, remain the following:

* Quarterly earnings reports and forecasts of future earnings.

* The cyclical nature of the economic recovery.

* Interest rates.

''The real nitty-gritty of it,'' observes William LeFevre, a market strategist at Purcell, Graham & Co., ''is the earnings of corporate America and the health of the recovery.''

Those earnings indicate that the country's ''smokestack'' industries - steel, autos, manufacturing - are growing stronger and that the country's high-tech industries - computers, telecommunications, biotechnology - are experiencing difficulty. In many ways the market is reflecting investor disenchantment with high-tech because of recent disappointing earnings results by Digital Equipment Company and American Telephone & Telegraph. On the other hand, strong quarterly earnings have been posted by Ford, General Motors, and Chrysler. Even some steel companies appear to be cutting their losses.

''That really says a lot about the health of the recovery,'' Mr. LeFevre says. ''Smokestack America is coming through on target. There are a lot more jobs at stake in those industries than in Silicon Valley or Route 128 (outside Boston).''

Rao Chalasani, associate research director at Prescott, Ball & Turben of Cleveland, notes that the strongest sectors of the market are automobiles and aluminum. He finds the stabilizing of the market and the drop in gold and silver ''very encouraging.''

Although numerous analysts had been predicting an October correction in stocks, this did not really materialize. But that all depends on what investments you have in your portfolio, says Dick Yashewski, director of technical analysis at Butcher & Singer in New York.

''If you had been holding technology stocks, brokerage stocks, and so on, you'd be having your October massacre right now,'' Mr. Yashewski said last week. ''But if you were in quality stocks - especially in the consumer disinflationary area - you'd be having a grand old time.''

If, overall, the market has been bearing up under disquieting international news, there remains an underlying apprehension about interest rates, especially with confirmation last week that the fiscal 1983 federal budget deficit was about $195 billion. That renewed fears of ''crowding out.'' For if an investor is to choose between highly safe government bonds and more risky corporate stocks, the money may flow out of the private sector.

Nonetheless, some analysts believe that America can have it both ways: economic expansion and relatively high interest rates. Norman G. Fosback of Fort Lauderdale, Fla., publisher of the technically oriented Market Logic newsletter, monitors a broad range of indexes. He notes that, while the stock market has not made a great deal of progress upward since last spring, technical signals, such as the Dow transportation and utility averages, are near their record highs.

''There is no question that the bull market is very powerful and optimistic, '' Mr. Fosback says. ''For months now virtually every technical analyst has forecast a correction, and every time it was wrong. The best way of riding this bull market seems to have been by staying fully invested.''

As for interest rates, the stock market and the economy can live withany level, he believes, so long as there is no sharp acceleration. He maintains that interest rates are more correlated with inflation than with the federal budget deficit - and inflation remains moderate. He recalls that last year, after the deficit hit a record $100 billion, the stock market, as measured by the industrial average, proceeded to double.