Atlantic Research Corp., a diversified high-technology company in Alexandria, has reached a significant milestone in development of a possible liquid substitute for oil.

And, as often happens when such a development is announced, investors have been attracted to Atlantic Research stock. Some 167,000 shares were traded last week as Atlantic Research stock jumped 18.9 percent in value to $15.75, just a quarter below the 52-week high of $16. The stock is up 26 percent in the past four weeks.

It is typical of what has been happening to local stocks for more than three months, as they gave out a loud hint of broad market recovery to come. Only now is Wall Street experiencing its bull market, with many traders convinced that Ronald Reagan will move into the White House next January and set the stage for a rebound in corporate profits and productivity.

At the GOP's own version of a bull market last week in Detroit, Reagan complained about what he saw as the reduced expectations of the Carter administration. Indeed, Washington's retailing sector has experienced a phenomenon that is described in similar terms, with flat sales attributed to the reduced expectations of many Carter appointees who see no firm source of income after next Christmas. m

Generally, however, Washington business is good. And investors have taken note: In the second quarter of 1980, the composite index of 30 blue chip Washington area stocks charted daily by Johnston, Lemon & Co. soared 30.31 percent. The Dow Jones Industrials rose 10.46 percent in the same period.

Added to the evident absence of real recession here, a series of technological developments has affected such firms as Atlantic Research and Flow General, two firms not in the Johnston, Lemon index. And a spate of friendly or unfriendly takeover bids and mergers is beginning to rival the go-go years of the 1960s, leading to an unusual flurry of trading.

After Manor Care announced last week that it would take over Quality Inns in a friendly merger, for example, 308,000 shares of Quality were traded as the stock price jumped 40 percent in one week to $14 a share ($14.50 in cash per share is being offered for up to 1.15 million shares of Quality, in a tender that began Friday).

Similarly, PepCom Industries is up 132 percent for the year, in the wake of a bid by a Far East firm to acquire control. Macke Co., the subject of what is to date an unfriendly but successful bid for control by Allegheny Beverage of Baltimore, leaped 94 percent in the second quarter.

Washington Real Estate Investment Trust, another subject of a possible acquisition by outsiders, was up 22 percent in the recent quarter and is trading at a 52-week high. Public details on this situation, which purportedly involves California real estate investors, are in short supply, but most current investors seem determined to hold onto their shares.

Among the Johnston, Lemon 30-index stocks (printed at the end of this column), Macke was the biggest percentage gainer in the second quarter, followed by Hechinger Co., up 80 percent on the recession-resistant characteristics of its business, higher profits and a 20 percent stock dividend; and Mortgage Investors of Washington, a real estate trust for which investors finally see some daylight in MIW's attempt to restructure its financial base, up 59 percent.

Outside the Johnston, Lemon index stocks, there are similar records of sharp stock runups. Flow General, up 13.4 percent last week and 118 percent since Jan. 1 to $61.50, is working in a number of exotic areas. The most recent to attract attention is development of a possible human skin equivalent. r

In the case of Atlantic Research, officials said they have successfully burned a low-cost slurry of water and finely ground coal without the assistance of any other fuel.

The oil substitute, called Arc-Coal, is intended to replace heavy oils used in large boilers and furnaces, such as those at utilities, ships and industrial plants.

The No. 6 heavy oil accounts for more than 2.5 million barrels a day of U.S. oil consumption and roughly a third of all oil imports. Of the oil used by the U.S. Army, for example, half is No. 6, Atlantic Research Executive Vice President William Borten noted.

Although Atlantic Research officials said they regarded the new burning tests as a substantial breakthrough, they expressed caution about future developments and said they could not immediately estimate expected revenues from possible commercial development of the mixtures.

At the same time, Borten revealed that Miami-based Florida Power & Light Co. has expressed an interest in the Atlantic Research project. Currently, Florida Power is conducting major tests with a coal and oil slurry. The Atlantic Research mixture, if proved commercially viable, would be cheaper.

Atlantic Research has been working on the No. 6 substitute process for more than two years, drawing on the decades of experience by its engineers and scientists in combustion engineering and rocket propulsion. Money for the research has come mainly from company funds, with early work funded by the Department of Energy, which remains interested in the oil substitute.

At first, the Alexandria firm developed the mixture, after which burners were modified to use the slurry. Borten said the recent tests were conducted with a relatively small burner, equal to the size that could heat 10 houses.

Development of a full pilot project would require an investment in the range of $1 billion, Borten noted.

The Atlantic Research official said no decisions have been made on future exploitation of the possible oil substitute process. Possible joint ventures and additional funding are being discussed.

In a separate development, the Department of Energy has turned down a proposal of two other Virginia companies -- Dynalectron of McLean and United Synfuels Corp. of Bristol -- to get federal funding for studying the feasibility of a plant to convert coal to gasoline.

Spokesmen for Dynalectron and United Synfuels said they hope to be more successful in seeking federal money for a multibillion-dollar coal conversion plant in southwest Virginia, when DOE accepts applications for $300 million of grants in 30 days. DOE turned down the firms' applications in an initial round of awards last week. Dynalectron has proposed a study using 25,000 to 30,000 tons of coal a day to produce 4 million gallons of gasoline.

Although the Virginia proposal was not approved, DOE did back grants to two regional firms. The A. Smith Bowman Distilleries in Fairfax got more than $400,000 to expand production of industrial alcohol, an ingredient in gasohol. And Americol Ltd., a Maryland firm. got $570,000 for a feasibility study of a proposed $32 million ethanol plant on the Eastern Shore or in St. Mary's County. Americol would use corn, wheat, barley, sweet potatoes, wood and wastes in the distelling process.