Ready to Rally?

As skittish as a newborn calf, Wall Street's bull market last week stumbled hard. Stocks dropped 14.82 points on the Dow-Jones industrial average to 637.36, well down from the peak of 678.10 in early August. Brokers all gave the same reasons for the market's weakness: tight money, the steel strike and Premier Khrushchev's visit. Many of them also agreed on what the market will do next. Said Carl M. Loeb, Rhoades Partner Samuel L. Stedman: "I expect a good strong rally before the end of the year, because there is money piling up in mutual funds, pension funds, and with other institutional investors; but it will be a market of selective stocks." Said Sidney B. Lurie of Josephthal & Co.: "The lows for most stocks are near at hand, and the stage is set for an autumn advance."

One of the reasons for optimism is that volume has been comparatively small; as the market slid, much of the selling came from small investors. Big institutional investors have not been selling, but they have not been buying either, thus have not been the bullish force they usually are. Brokers do not think that much of the bad news on the domestic side is cause for great concern. For two weeks, the market's anticipation of a rise in the Federal Reserve's discount rate added to the decline. But at week's end, after the rise came, the market rebounded. As soon as the steel strike is settled, brokers expect the market to seek new highs in a sustained rally.

Some bears counter that the reverse spread between stock and bond yields (see chart) will cause a shift in money from stocks to bonds. They argue that in the past, when bond yields have far exceeded those of stocks, the market has tumbled. But investors in today's market have shown little interest in getting highly taxed dividends; most are seeking capital gains, which are not only lower-taxed but are a hedge against inflation. Those who have shifted over the past year have had heavy losses, because prices of bonds have fallen--although their yields have risen accordingly.

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