Stock Market Blahs - Or Price Breakout?

CAUTION is the pattern for Wall Street. There's occasional volatility in the Dow Jones industrial average, but within a lackluster trading range. That pattern of modest ups and downs, analysts suggest, is apt to continue through June and possibly into fall. Still, the consensus here is that the long range direction for the market - barring any unexpected shock - is for the Dow to move past the 3,000 mark. In recent days the Dow has been running around 2,890.

Almost anything is possible for the stock market, as longtime watchers know too well. For the moment, however, the market is characterized by the blahs. The ``players [investors] just aren't out there right now,'' says Larry Wachtel, a market analyst for Prudential Bache Securities. Two weeks ago the Dow shot up some 70 points in a few days, notes Mr. Wachtel, but on very limited volume of share sales. Then on June 18, the market fell more than 53 points, but once again on limited volume. When trading volume is low, program trading can easily kick the market up and down in short bursts.

``You're going to see the market fluctuate around like this during the summer months, at least, until there's a clearer picture that interest rates are going to come down. But until that happens,'' Wachtel says, ``the bond market is going to be very competitive with equities.''

John McElroy III, who is a principal with 1838 Investment Advisors, based in Philadelphia, also sees a pattern of caution and sluggishness, in part reflecting low volume and continued belt-tightening by the Federal Reserve Board. The Fed does not appear particularly eager to ease interest rates, despite the slowing of the economy.

1838 Investment was the investment advisory arm for Drexel Burnham Lambert Group until the Philadelphia office went independent in a management buyout in 1988. 1838 Investment manages some $3.5 billion in assets. About 47 percent of that sum is now in stocks, another 47 percent in bonds, and the rest cash.

The percentage of assets placed in stocks has been reduced somewhat in recent months, reflecting Mr. McElroy's perception of a modestly overvalued stock market, as well as the relative attractiveness of bonds. If he felt that stocks were a little cheaper, McElroy would be prepared to buy back into equities. He's even willing to allocate as much as 70 percent of the portfolio to stocks.

McElroy notes that in investment terms in general, there's currently no real shortage of funds to put into the stock market. His reasoning? The big interest in junk bonds and mortgage-backed securities has dimmed, following their glory days in the late 1980s. Personal savings are up. And the federal budget deficit is down as a proportion of gross national product compared to the late 1980s - requiring relatively less Treasury borrowing. So why then is cash not flowing back into the market? There are far fewer equities to choose from these days, he notes - perhaps as much as 20 percent less stock now than in the mid-1980s because of the corporate buybacks and leveraged buyouts of that decade. And relatively high interest rates shore up United States Treasury issues, which he calls a ``safe haven.''

McElroy figures one way to invest in stocks is to look for companies with a solid global presence.

For now, he sees a somewhat drifting market, and even, perhaps, a slight downward market correction during the next year - but with the long-term direction upward.

Could that upturn come even sooner?

Some analysts say yes. Gene Jay Seagle, director of technical research for Gruntal & Company, says the market may flounder for the next few weeks, yet push through 3,000 this summer. The market, he notes, hit an all-time high of 2,935.89 on June 15. June, Mr. Seagle claims, is historically slow for the market, although he's not quite sure why. But he expects the Dow to crack the 3,000 level and settle out at around 3,150 by the end of the year or early next year.

Stockholders can only hope he's right.