The Japan Watch On Wall Street

DESPITE the market downturn in Tokyo, Wall Street's Dennis Jarrett is not yet throwing in the towel on equities.

Mr. Jarrett is chief market "technician" for Kidder, Peabody & Co. Surrounded by charts, graphs, and other financial information, Jarrett attempts to cut through the fog of statistics and determine the future direction of the United States stock market. And what Jarrett is seeing now is a US stock market that "could" rebound in the next few weeks, based on low inflation, the presidential election-year cycle that favors a strong economy, and the lack of good alternative investments.

"Sentiment has become very negative in the marketplace," says Jarrett. "But it's worth remembering that the market in general - not the Dow Jones industrial average, but other market indexes - is pretty well washed out. The NASDAQ over-the-counter index peaked in February, for example." Thus, the downturn in the Dow last week was a case of the blue-chip market catching up with the broader market.

While not ignoring the Tokyo market's problems, "much of that situation has been overblown here," says Larry Wachtel, a vice president with Prudential Securities Inc. He was encouraged by a sharp rally in the Dow last Thursday, despite unhappy news in Tokyo the prior day. On Friday, prices in both Tokyo and New York rose strongly.

Gene Jay Seagle, a vice president with Gruntal and Co., an investment house, predicts a market rally sometime this spring. One factor that should help, he says, is the coming to maturity of $150 billion worth of bank certificates of deposit now earning low interest rates - about 4 percent on three-month CDs.

During the next three months, "some of that [CD] money can be expected to be shifted to equities," Mr. Seagle says.

In April alone, CDs worth over $100 billion are expected to mature. During the first quarter of 1992, investors cashed in over $60 billion worth of CDs. Part of that money was put into equities. But a significant amount was parked in low-paying money market accounts - money which Seagle says will be moved to equities should investors anticipate a new bull market.

Many brokerage houses have also breathed a sigh of relief at the latest news on inflation. Low inflation, approximately 3 percent a year over the next few years, should help shore-up the stock market, according to a study by Salomon Brothers.

A number of analysts still urge caution. Elaine Garzarelli, chief market technician with Shearson Lehman Brothers, sent shock waves through Wall Street last week by substantially lowering her forecasts for the Dow this year. Her remarks were widely quoted. Whereas she had been somewhat bullish on the market several weeks ago, she is now taking a "neutral" stance.

Factors that worry many market technicians are the high price/earnings ratios of stocks; lackluster-to-bad first-quarter corporate earnings; and slow economic growth in Europe and Japan, which hits US manufacturing exports.

What would most help the US stock market "would be another cut in interest rates," one market strategist said. He got his wish Thursday, when the Federal Reserve pushed short-term rates under 4 percent.