For nearly 18 months, the stock market has been behaving like one of those video blips that shuttle back and forth in a Pong game.
Locked into a narrow trading band of about 100 points, the market has dropped every time the Dow Jones industrial average reached 1,000 and has bobbed up again when it slipped below 900. With the Dow hovering near the low end of this range, stock market analysts again are looking for a rally to develop. They are fortified with statistics that show few seasonal phenomena are as reliable as the traditional summer stock market rally.
A study by Smith Barney, Harris Upham & Co. shows that such an advance has occured in each of the past 37 summers going back to 1940, with an average gain of 9.7 per cent.
Using a different measurement base, Reynolds Securities research chief Robert H.S. Stovall reached a similar conslusion. He said a rally has been recorded in each of the 31 summers since the end of World War II, with the best gain (22.5 per cent) recorded in 1970, the weakest (2 per cent) in 1969, up a flat 2 per cent, and an average advance of 9.5 per cent for the period.
As positive background factors for the market, analysts also note that concerns that inflation and interest rates would accelerate for the rest of 1977 have begun to abate. Corporate profit reports for the second quarter are expected to be robust. When they start pouring in early in July, they could be enough to kick off the awaited rally.
Bud Simons, vice president and research chief at Weeden & Co., believes the rally's takeoff is "likely to startnow, and maybe has already started. I think all of a sudden things are going to look pretty good, and the main question then will be whether the economy slows down later this year. But the answer won't be visible in the statistics for quite sometime to come."
But despite the emerging rally consensus, few analysts predict the market will build up enough steam to break through the 1,000 barrier and stay here.
The 1,000 level has in fact sereved as an effective psychological lid on the market for more than a decade, with the Dow hitting 995 in 1966 and reaching its all-time high of 1051 in 1973, only to slip back quickly and signal the beginning of the devastating 1973-74 bear market. Last year, the Dow pierced 1,000 more than a dozen times, only to fall back again each time.
In the decade that the market has been flirting with the 1,000 level, inflation has gone up more than 80 per cent, effectively cutting in half real equity values which have stayed stuck. In the view of some, that fact might be the market's biggest problem - a kind of self-fulling analysis that dampens enthusiasm and sends investors scurring to safer and more profitable alternative investments.
"People have been unable to have a fair shot at making money in the equity market for the last ten years. From a retail standpoint, it has created a lack of interest and diversion of money into other areas," commented Jacques S. Therriot, senior vice president with Smith Barney.
Even a short rally would be a relief to Wall Street, because the market has had a hard time all year putting together even two strong days in a row, as E.F. Hutton vice president and market analyst Newton F. Zinder said.
On Tuesday, for example, the Dow industrials on strong volume notched a 10-point advance, their biggest gain in two months, on the surprise news that Margan Guaranty Trust Co. cut its prime rate. The following day saw the market immediately lose momentum and the Dow slide back 5 points. On Thursday, it registered a mild gain of 2.88 points, and on Friday it was unchanged.
"The Market's main consistency seems to be its inconsistency," said Zinder. But he is now looking for "something that can be called a summer rally" and thinks "we have a good chance of moving into the upper 900s." For 1977 as a whole, Zinder thinks it will be "a year that will neither satisfy the optimists nor the pessimists."