Despite good economic news, investors are still on the defensive

Economic news has been upbeat: tame inflation, a not-too-expansive money supply, strong corporate earnings. But the old line ''What have you done for me lately?'' is on the lips of money managers.

A number of market analysts say that while the Dow Jones industrial average has been able to ''trace a bottom'' around the 1,130-to-1,150 range, it is still unable to rally back to the dizzying heights of the first week of January.

Last week the Dow ratcheted upward during most trading sessions. It closed Friday at 1,169.07, up 10.99 points for the week.

It was a week in which blue-chip stocks did well -- primarily, it seemed, because of favorable first-quarter earnings reports that were announced by a number of companies. But those profits were expected by most analysts. Now they are having to make investment decisions based on forecasts of what will be happening to the economy, interest rates, and corporate profits in the second, third, and fourth quarters of 1984 and beyond.

How will the economy fare?

Be prepared for a fresh draft of economic fuel to pour into the financial system during May and June, advises economist William C. Melton of the Minneapolis-based IDS-American Express. But don't be fooled by the temporary boost this gives the economy, he is warning his portfolio managers.

Just as happened last year, he says, that economic fuel will come in the form of income-tax refunds. Most of this money goes into checking accounts.

Last year these tax refunds amounted to $7.2 billion, which Mr. Melton calculates as an annualized $30 billion injection into the economy -- a 15 to 20 percent growth rate in the basic Federal Reserve measurement of the US money supply (M-1).

''A lot of money managers are looking for a rerun of the roller coaster we had last year,'' he says. ''We had a great April rally and then a May and June panic. As a result, a lot of people will use signs of strength to take a more defensive posture.'' That defensive posture is what Melton is recommending to his associates.

Stock market analysts concur that despite the strengthening of the Dow, a sustained upturn is unlikely. Interest rates weigh heavily on their thinking.

Although the basic money supply continues to register within the Fed's target range, the government's borrowing needs and those of businesses and consumers may collide, producing another increase in interest rates. The bond market appears to be marking time, waiting for this to happen.

''The stock market has held up well in the face of a weak bond market,'' says E. F. Hutton technical analyst Newton Zinder. ''It might make it up to 1,200, but the big rub is interest rates. At some point, if interest rates go up again -- or simply don't go down -- the market may begin to dump stocks.''

Mr. Zinder says the only strategy he can recommend is extreme caution and ''true selectivity'' in choosing stocks.

Prudential-Bache analyst Larry Wachtel notes that ''the bulls are saying the economy is slowing down, the bears are saying March was the cool-off and it (the economy) will heat up again, and the bond market is saying nothing.''

Mr. Wachtel, too, sees 1,200 as the upside limit of the Dow for the present, and he does not think there will be a rapid or sustained decline soon. ''The market's been hosed down pretty well for about five months now,'' he says.

Consumer confidence, capital spending, and loan demand remain high, he notes. This is putting upward pressure on interest rates. But even if rates rise again -- which he thinks is likely -- the market is already discounting this news into current stock prices and thus will not be too upset when the increases materialize. He recommends a strategy of sticking with defensive stocks such as utilities (the phone companies, natural gas, etc.).

Slightly more optimistic is Merrill Lynch analyst Hans Schueren. He thinks the Dow has been ''base building,'' and while it might ''test its lows of 1,130- 1,135'' during a bad day, ''it is in no danger of a collapse.''