Bulls Predominate After Gulf War

THE Gulf war has meant the liberation of the United States stock market as well as the freeing of Kuwait. Since Jan. 16, when coalition forces began their assault on Iraq, the market, as measured by the Dow Jones industrial average, has shot up some 450 points. And last week Wall Street sent out a roar. By midweek two of the four major market indexes hit new highs: the Standard & Poor's 500 and the New York Stock Exchange composite index, both broader indexes than the Dow Jones industrial average, with its listing of 30 blue-chip stocks. And two other broad-based indexes also set records, the Wilshire 5,000 index, which lists almost all major stocks traded, and the Hambrecht & Quist technology index, which monitors high-tech stocks.

Even the mighty Dow was again pushing against the 3,000-point barrier that it had almost penetrated last summer. Foreign markets are also jumping onto the bull-market bandwagon.

``The market advance is broad-based and deep,'' says Dennis Jarrett, chief technical analyst for Kidder, Peabody & Co. While not discounting the possibility of investors pausing to take profits, Mr. Jarrett predicts that the course of the market is definitely up. His main concern? That the current rally will prove so dramatic that the market could become ``seriously overvalued later this year, as happened in mid-1987,'' before the October crash.

Jarrett notes that by historical measurements the current advance is far broader than during the inception of the bull market in late 1982. That year, for example, the market had four days in a row when there were more than 1,000 advancing issues. This January, notes Jarrett, there were six days in a row of such advances.

Jarrett says the performance of secondary stocks, rather than prominent blue-chip issues, is what is now propelling the market. ``Historically,'' he says, the rise in secondary issues ``has tended to indicate that major declines are not forthcoming.'' It is only when secondary averages underperform the popular averages for long periods that the potential for a major market downturn is imminent, he says. Last week NASDAQ's composite index hit its highest level since October 1989.

Factors helping to fuel the rally, he says, are strong cash positions held by institutions, plus end-of-the-quarter pressure on portfolio managers to produce earnings results. Individuals are also putting gobs of money into equity mutual funds.

Current market gains are quite ``unlike the rally of July, 1990, when the Dow was pushing towards the 3,000 level,'' says Larry Wachtel, an analyst with Prudential Securities Inc., ``That was a solo performance [by the Dow]; this is very broad-based, involving secondary issues.''

Mr. Wachtel sees the current rally linked to three factors; the successful conclusion of the Gulf war, which has given a boost to ``reconstruction'' stocks - such as technology issues, or companies that will participate in the economic rebuilding of Kuwait; the lowering of interest rates by the Federal Reserve Board, which has given an impetus to consumer spending; and finally, anticipation of an end to the recession.

Sectors now showing special market gains are computer stocks, food companies, high-tech issues, construction companies, as well as secondary stocks in general, say Gene Jay Seagle, director of research for Gruntal & Co. ``The postwar rally is clearly on,'' he says; the pause in the market in late February, when the market seemed to flounder, was merely a ``hesitation waltz'' while investors took profits.

Despite the euphoria here, some observers continue to be concerned about high share prices, now running at about 2.5 times book value and over 17 times earnings. That's the type of scenario, critics say, that suggests a sell off - and downturn. In 1982, price/earnings ratios were far lower, about 7.

Also worrisome: continuing caution by consumers, which could delay the end of the recession. Consumer spending results in about two-thirds of the US gross national product.