Will Stock Market Investors Feel Monday Morning Blues?

INVESTORS' eyes will focus on Wall Street this morning to see if a long-expected stock-market slump gets worse.

"We'll probably get a [trading] jolt or two early in the session," says Gregory Nie, chief technical analyst for investment house Everen Securities Inc., Chicago. "But what we now have to wonder is if the sellers are going to take command - and kick the trap door open."

Already on Friday, the stock market took its steepest dive since 1991. The Dow Jones industrial average plunged 171.24 points, or 3.04 percent, to 5,470.45.

Analysts blamed a Labor Department report Friday that 705,000 jobs were created in February, more than in any month since September 1983. The job gains, partially reflecting better weather, were much bigger than anticipated by most economists. This raised concern that the Federal Reserve will raise, not lower, interest rates. As a result, bond prices tumbled sharply, pushing up the yield on the 30-year Treasury bond from 6.46 percent to 6.72 percent, its highest level in six months.

Economists are debating whether the employment numbers reflect an upturn in the economy or whether economic weakness will continue.

Mr. Nie recalls that the market looked like it "was going to drop downward in January, but then the buyers came back."

Indeed, in the first two months of the year, equity mutual funds saw net inflows of $50 billion. That amount is 30 percent more than the net flows into stock funds in all of 1991. Market watchers see that cash flow, much of it coming from Individual Retirement Accounts and 401(k) and 403(b) retirement accounts, as a stabilizing factor in the stock market. The multitudinous baby boomers are saving for retirement, experts note.

Nonetheless, whether or not the market's current volatility marks the beginning of "a more fundamental correction" will be determined "during the next day or two," Nie says.

Analysts often define a correction as a 5 to 10 percent decline in stock prices.

"This should be a good educational process for the public," says Larry Wachtel, a vice president with investment house Prudential Securities Inc. "It's a case of 'good news' being very 'bad news' for the stock market. This market has been largely driven by falling interest rates. But rising rates would change everything. When rates are falling, there are no real alternatives to the stock market. But when rates start to rise, [there are] far fewer reasons" to stay fully invested in stocks.

"The market has risen some 1,800 points since December 1994," Mr. Wachtel says. "It has gone up 600 points this year alone." He sees the possibility of a correction as sharp as either of these upside gains.

"This is very similar to a correction earlier this year, when the market moved from 4,650 points up to around 5,250 points and then pulled back a little. This has been a very overbought market, and so some pullback has been in order," says Gene Jay Seagle, president of Tactics & Technics, a financial consulting/information firm in Weston, Conn. But Mr. Seagle sees no large-scale downturn. There is still a "lot of liquidity" in the market, he says, including new money that has gone into money-market funds and mutual funds. "Mutual fund holders are not going to jump and run. They are in the market for the long haul." Even if there is a small correction of 5 percent or so, the mutual fund inflows will prevent the sell-off from turning into a rout, he says.

Still, some contrarians believe that the massive inflows into mutual funds are worrisome - and may indicate storm clouds ahead. The latest surge of mutual fund inflows may be the signal of a peak in the current bull market, says James Stack, who publishes InvesTech, a financial newsletter.