The 1978 Stock market has been one of the most exciting, volatile and difficult to fathom in nearly a decade.

So far this year, the market has confounded the experts. It has continued to shrug off negative news and move up in spite of higher interest rates, a weaker dollar, higher inflation and steeply declining confidence in the Carter administration - factors that in years past would have sent the market into a tailspin.

"They could announce that World War III has broken out and this market would go up," one broker has quipped.

With the economic outlook particularly cloudy, opinion is divided between those who think the market alreadly has discounted most of the bad news ahead and will continue to perform well, and those who think that this is the third and final stage of a bull market that began in late 1974 and could end soon.

But on Friday, the market moved decisively to higher ground, with the Dow Jones average of 30 industrials advancing 14 points to close at 907.74, its highest level in more than a year.

Counteracting the background of bad news has been the prospect that Congress soon will pass a tax bill that significantly reduces capital gains levies and favours investors.

Meanwhile, many on Wall Street view the nationwide fallout from California's Proposition 13 initiative as a turning point in the effort to decide the question of the size and role of government versus the private sector in the U.S. economy. And they feel that such a shift can only be good for business and investment.

This year's market has been characterized by institutional buying stampedes and a return of speculative fever. There is also the feeling that the individual investor is back.

Two major stampedes in April and in August repeatedly set volume records on the New York Stock Exchange. On Aug. 3, an astonishing 66.4 million shares changed hands. Daily volume in August, usually one of the slowest of the year, averaged a record 38 million shares.

The vast pools of cash that the big pension funds, bank trust departments and mutual funds continue to have on hand, plus foreign investors' renewed interest in U.S. equities, constitute a massive reserve of liquidity that has proved to be a powerful propellant whenever even a small percentage moves back into the stock market.

A one percent increase in institutional investment in the stock market represents $5 billion, by one estimate, and the institutions like to travel as a herd whenever they do plunge, which accentuates their impact.

Meanwhile, feverish speculation - primarily in gambling stocks, and more recently in airline and real estate issues - has returned to the market in force for the first time in nearly a decade.

Some brokers welcome this development because they feel it has drawn many individuals back into the market, and may forecast a more broadly speculative and market in the months ahead.

Many major firms, however, think the crapshooting has been excessive and uninformed and could be a prelude to a damaging blowoff in which these newly returned investors find themselves holding the bag.

A list of the 10 most active NYSE stocks during a recent week on the Big Board included Ramada Inns, Bally Manufacturing, Pan American World Airways, Holiday Inns, Del E. Webb Enterprises, Allegheny Airlines, National Airlines, Ceasar's World and Columbia Pictures - hardly the kind of blue chips that traditionally lead the market to higher ground.

At the same time, the overall market has continued the trend of the last several years in which the "secondary" stocks, or those representing companies with smaller market capitalization, have outperformed the well-known glamors and blue-chip industrials. Some olddd favorities like Kodak, IBM and Du Pont have shown some good strength lately.

The bull rally in secondary stocks is now four years old, with several indices that reflect these companies at or near record highs. This has led to repeated predictions of some kind of correction, but that has not yeat transpired.

In fact, the NASDAQ industrial index of some 1,600 over-the-counter stocks set a record high of 154.24 Friday, up 44 percent for the year.

Ant through the end of August, the American Stock Exchange market value index was up 29 percent for the year and the NYSE composite index was up 11 percent, while the Dow Jones average of 30 industrial stocks - the most widely watched indicator - was up only 6 percent.

The Dow began the year just under 820, and then dropped steadily through January, February and into March until it hit 740 before beginning a series of moves that have kept the index flirting with the 900 barrier recently. So from the year's bottom to current levels, the Dow advance acutally represents a gain in excess of 20 percent, which is not bad for a market move.

What lies ahead?

The scenario most favored on Wall Street right now is for an economic slowdown, or even a mild recession, that would let some of the inflationary pressures abate and allow interest rates to peak some time in the fourth quarter and then retreat.

Continued strong economic activity that will keep the torch under inflation and force a much tighter monotary stance by the Federal Reserve Board and far-higher interest rates could derail the market, on the other hand.

Robert Farrell, the head of market analysis for Merrill Lynch, Pierce, Fenner and Smith, believes that "September is going to set the tone for the rest of the year, inversely."

If the market is strong in September - which is what is shaping up - Farrell looks for a reversal in the fourth quarter. But if there is a correction this month that allows some of the excesses in the market to taper off, Farrell believe the rest of the year could be bullish.

But Farrell notes that "this has been a market in which concentration on specific stocks has been more rewarding than an overview - it has really descredited market timing."