Spoiling for a rally? Remember watched pots

Remember the summer rally? It was the talk of the investment world a few short weeks ago. Where is it? Wondering where the summer rally is - and perhaps even giving up on it - is the best thing that can happen to the market, according to the contrarian crowd on Wall Street. The key to getting a rally going, they say, is for all of the fence-sitters to be shaken off their perches.

If the market continues to flirt with its low for the year, then quite a few of the investors who have been contemplating selling may up and do so. That, these analysts say, would wring the pessimism out of the market.

''As people give up on the summer-rally thesis, the prospects for one improve ,'' says Harry Laubscher, a technical analyst at Paine, Webber, Jackson & Curtis of New York. ''I've been getting all sorts of calls for short sales and other indications of worry.''

And yet, says Mr. Laubscher, a number of things are in the market's favor today. Interest rates appear to be stabilizing. Sectors of the stock market that are sensitive to high interest rates (housing, as a prime example) have been improving. The bond market has been firming.

And this is a presidential election year, traditionally a time when the market does well, Laubscher says.

His strategy? A conservative investor should sit tight and build up some cash. The more adventurous individual might take advantage of those relatively low-priced interest-sensitive stocks. Professional traders might watch for high fliers that have fallen.

In the marketplace last week, confidence was a fragile commodity. Early on, the market appeared to be gaining strength, but late in the week the widely followed Dow Jones industrial average slipped - due, many analysts felt, to a massive selling program initiated by the Salomon Brothers investment house.

The nation's money supply, as reported last week, was well within the Federal Reserve's target range, thus sparking hope that the Fed would not tighten credit further. That, in turn, helped the bond market and the stock market, which generally moves in accord with the bonds. The Dow closed Friday at 1,101.37, ending the week down 8.50 points.

By latest evidence, the economy is still charging along: Personal income measured an 0.8 percent increase in June; the Atlanta Federal Reserve Bank said second-quarter gross national product figures (due out today) would show 6.8 percent growth rather than the 5.7 percent originally estimated. Conventional wisdom says these sorts of economic data will cause the Fed to maintain a more restrictive credit policy to keep inflation under control.

Still, a number of analysts maintain it is always darkest before the dawn.

''We are very close to a bottom from which a good summer rally can begin,'' says Mark Tavel, president of Value Line Asset Management in New York (a division of Value Line Investment Survey).

Mr. Tavel contends that despite economic signals showing a still-robust economy, more moderate growth is occurring. He cites a recent report by General Electric that foresaw deceleration in the consumer-durables sector: ''GE wouldn't say it if they didn't see it. And if they see it, others do also.''

With more moderate economic growth, the pressure that makes credit tight and that stimulates inflation would ease. Already, Mr. Tavel contends, prices on the long-term government bond market have hit bottom, with yields of around 14 percent.

Tavel's investment strategy has been to reduce cash to 5 to 10 percent of the total portfolio and to use the last slug of cash ''to be fancy and look for 'high beta' stocks,'' meaning stocks more volatile than the market as a whole.

Since interest-rate levels seem to be the key to market performance, it should follow that those interest-rate-sensitive stocks would be good to snap up. When rates moderate, those stocks would stand to gain.

This approach is used for the Legg Mason Value Trust mutual fund. Fund managers Ernest C. Kiehne and Bill Miller are research specialists at Baltimore's Legg Mason Wood Walker brokerage.

Their mutual fund is unusual in several ways. Not only does it take a contrarian approach to the market; it is also one of the few that is run by the research arm of a brokerage. During the difficult period between last summer and this summer, the $70 million fund has been up 4.5 percent, placing it fourth among growth funds.

Strategy has been to go after stocks that have had a low price/earnings ratio , that trade at a discount to the company's book value, that bring in above-average yields, or that are out of favor because of earnings disappointments on Wall Street. Of late, those criteria have led Mr. Miller and Mr. Kiehne to go after interest-sensitive stocks: home builders, textiles, some technology stocks, and regional banks.

''Most people buy stocks at or close to their 52-week high,'' Mr. Miller says. ''We buy when they are at their 52-week low. We look for stocks that, if we had bought them anytime in the last year, we would have lost money - not made money.''

Following such a strategy, if interest rates drop, the future should be bright. Until then, hardy investment managers like Miller and Tavel will be buying ''bargain stocks.'' Paine Webber's Laubscher will be waiting for the last pessimists to be routed from the market.

And the summer rally will be just over the horizon. A horizon that is approaching if you are a bull about today's market. Receding if otherwise.