Investors Stay Alert To New Dips in Markets

WARINESS is the watchword on Wall Street, despite last week's apparent turnaround in the United States stock market. Even though financial markets were down moderately on Friday, they picked up substantially Tuesday, Wednesday, and Thursday, with stock prices rising almost 100 points on the Dow Jones industrial average, following a 42-point drop Monday and sizable dollar losses and frenzied trading in late March.

Despite the partial rebound, however, the investment community is nervous about economic or political surprises that could trigger a new sell-off. Among the concerns: instability abroad, such as trade difficulties between the US and Japan following the resignation of Prime Minister Morihiro Hosokawa.

``I'm now getting letters and calls from lots of investors who are very apprehensive about the markets,'' says James Stack, who publishes InvesTech, a newsletter. Mr. Stack pulls out one letter from a man in Arizona who says he has $1 million invested in the market. Recent market gyrations, in which the Dow Jones industrial average fell more than 200 points, are ``frightening,'' the letter-writer says. ``I'm going to hang in, but I don't know for how long.''

Stack's letter writers are not alone in wondering how long they can ``hang in.'' The big question on Wall Street these days is whether investors in general - including large institutional accounts - will stay put or begin redeeming assets en masse, as was the case in the market crash of October 1987.

In recent weeks, thousands of individuals have shifted assets from equities and bonds into cash positions, such as money market accounts. Some bond funds were hard hit by redemptions. Most brokerage houses continue to advise clients to remain cautious - but invested.

Not the end of the downturn

On Friday, the Dow closed down 19 points to 3,674.26. For the week, the Dow was up 38.30 points. ``I just don't think the bloodletting has stopped,'' Stack says. He adds that the Federal Reserve will make additional hikes in interest rates later this year to slow now-vigorous US economic growth and prevent a possible resurgence of inflation. The Dow could fall as low as 3,300 points in the next few months, Stack says.

``We've reached a temporary bottom,'' says Hildegard Zagorski, an analyst with Prudential Securities Inc. It is unclear whether the market could hold steady in the event of a new economic, political, or foreign policy crisis, she says. Prudential's chief market technician, she notes, sees the Dow dropping to the 3,300 point level during 1994.

Still, Ms. Zagorski notes, Wall Street is taking the latest round of upbeat economic news with ``great calm,'' - including reports last week showing strong sales gains by retailers such as Sears, Roebuck & Co. and J. C. Penney. Many stock traders recoil when economic news is too good, believing a strong economy invariably produces inflation and a tighter monetary policy.

Low-key approach

One factor helping last week's market rebound, experts say, was the low-key approach of Federal Reserve Chairman Alan Greenspan. In a speech to business leaders in San Francisco, Mr. Greenspan made no reference to inflation or additional rate hikes.

Despite some concern about continued slippage in stock indexes, the consensus here is that the recent Sturm und Drang is more the long-awaited market correction than the beginning of a new bear market. A correction is usually defined as a downturn in stock values of 10 to 15 percent; a bear market typically means a downturn of 20 percent or more. The current decline is in the 9 to 10 percent range.

``We're going to have another two weeks or so of a modest rally accompanied by trading stability, and then see some more dips,'' says Dennis Jarrett, senior vice president with investment house Kidder, Peabody & Company. ``A lot of factors that one might see in a correction have yet to occur, such as major redemptions of [equity] mutual funds. Complacency now seems to be the rule.''

Still, Mr. Jarrett says the market, in part because of strong corporate earnings during 1994, will eventually rebound. ``By next year at this time, we should be seeing a Dow of around 4,000 points,'' he reckons.