Nagging Concerns Put Chill On US Stock Market's Rise

As January draws to a close, is the stock market about to plunge into the deep freeze?

For the past three weeks, the Dow Jones industrial average has been bounding upward toward the 7000 point level. Even the weather here seemed to be cooperating, with unusually balmy days during much of January. On Thursday Jan. 23, the Dow almost broke through the 6900 point level.

Then, suddenly, the financial winds seemed to shift. The Dow dropped 94.28 points last Thursday, and another 59.27 points on Friday, closing at 6696.48.

"There just doesn't seem to be any real hard news" explaining current market instability, says Arnold Kaufman, editor of The Outlook, a newsletter published by Standard & Poor's Corp. Rather, a lot of "little things" seem to be happening, he says:

* There has been "a growing divergence between bonds and stocks," with the yield on long-term bonds moving up toward 7 percent as bond prices skidded last week. Normally, a rise in interest rates is a bad sign for stocks, since it raises corporate borrowing costs and makes bond yields more attractive relative to stocks.

* The dollar - after rising sharply against other currencies in recent months - succumbed to some profit-taking Friday.

* Corporate earnings reports have been good, but perhaps not quite up to expectations.

* "There's been a lot of 'momentum' investing recently," with investors scrambling to get aboard the rising market, Mr. Kaufman adds. Many investors have been pouring money into index funds, which mirror major market indexes, such as the Standard & Poor's 500. The large run-up in prices this year could bring about a "decline of significant proportions at any time," Mr. Kaufman says, adding "it would probably not take much to make it happen."

But these factors by themselves don't "explain why the market is having difficulty," Kaufman says.

The drop may be just a short-term "breather" in a bull market.

Given the pace of recent gains, "if the Dow gives up 100 points or so, that's not necessarily a bad thing," says Larry Wachtel of Prudential Securities Inc. in New York.

But the drop coincided with one of the last "bears" on Wall Street - market guru Elaine Garzarelli - reportedly changing her advice from "sell" to a bullish forecast of a 10 to 15 percent Dow rise this year. As of this writing, she has not been available for comment.

"When the last bears capitulate, that's when you have to start worrying about the market" getting overheated, says Guy Truicko, a portfolio manager at Unity Management in Lake Success, N.Y. The reports of Ms. Garzarelli's shift surfaced late Thursday just about the time the market began to drop sharply.

The concern echoes Federal Reserve chairman Alan Greenspan, who recently wondered aloud whether the market was expressing "irrational exuberance."

Bond prices fell last week as economic-growth forecasts were revised upward for the early 1997. "If the yield [on long-term bonds] moves above 7 percent, the market will almost surely correct" downward, Mr. Truicko predicts.