Wall Street is breathing a loud sigh of relief this week, hopeful that the stock market has hit bottom and is headed up.

The consensus view seems to hold that the key measure of stock activity, the Dow Jones Industrial Average, bottomed out last week at 776.92. "We are now in a rally of some magnitude," said William LeFevre, vice president and strategist at Purcell, Graham & Co. Inc., who predicts that, by the 1984 election, the industrial average could climb to the 1,200 mark.

"It is essential to recognize that this is a bottom," said Rao Chalasani, senior vice president at Cleveland's Prescott, Bull & Turben, who aggressively told clients to get into the stock market last week. Chalasani said it is "entirely possible" that the industrial average might rise by between 100 and 200 points within the next six months.

Donald Trott, chairman of the investment policy committee at A.G. Becker, said today his firm is predicting that the industrial average should rise to the 940 mark by the end of January. "The likelihood is continuing high volume, higher highs on these thrusts and higher lows," Trott said.

Without question, Wall Street today is euphoric. The industrial average fell slightly today, but volume was an astonishing 133 million shares -- breaking the single-day record by 40 million shares -- and the industrial average has gained over 50 points in just a week.

"It's kind of frightening for a guy who has spent one-third of century in the market," said LeFevre. "I thought I'd never see anything like this."

In the last two days, market investors -- both large and small -- have begun coming out of the woodwork. "The phones are jingling and jangling," said Eliot Benson, research chief at Washington's Ferris & Co. Inc. There is emotion in the decisions to return to the stock market, but there is also a great deal of financial realism in the market's leap.

"The money manager mentality had become more and more nervous," said Richard Schmaltz, codirector of research at Morgan, Stanley Inc. As a result, institutional investment coffers, as recently as June, were widely reported to have more than double the cash they usually hold.

"Cash and short-term investments have built up in people's portfolios because people have thought they were getting paid a nice price to do nothing," Schmaltz said. "Now, if these interest rate [declines] prove out, you have to make a different decision: You have to reconsider and that is what is causing the pressure to move."

But it is not difficult to find skeptics, too. "I have some reservations about how real it is," Lillian H. Blucher, senior vice president at District-based Folger Nolan Fleming Douglas Inc., said of the rally. "My reservations are fundamental ones. This sharp decline in interest rates reflects the fact that the corporate sector is weaker than people expected it to be.

"We are not going to get the capital spending that the president had hoped for," Blucher said, pointing out that a current spate of corporate bond issues reflect that companies are funding short-term debt rather than making capital investment in upgrading their own operations. "Earnings will be pretty flat and somewhat disappointing for a time and the recovery pretty anemic in 1983," she said.

Morgan Stanley's Schmaltz, noted that the market's surge is "what we've been hoping for for months." But he also cautioned that, although there may now be an "emotional opportunity," it is likely that a broad market recovery is going to take time.

"You still have bankruptcies, both company and country, and you'd like to see some economic momentum," he said. In that environment, "It would be hard to see stocks continuing to do well. I'm not gloating."

Similarly, James Balog, senior executive vice president at Drexel Burnham Lambert Inc., who called Tuesday's dramatic stock market rise "excessive," said that, although he believes stocks must look better in an environment where fixed interest rates are falling for other instruments, a broad market rally is "contradictory" to the current economic climate.

"My guess is that the market will very quickly return to the reality of the underlying economic trends," Balog said. The economy "will go up slowly from here, and the market will reflect that."

"We are still in an extremely difficult period. The economy is not going straight up. There is plenty of instability in the world, and we are still in the most dangerous period for failures. There is plenty of trouble out there, and we haven't seen the last of the Penn Squares or other kinds of calamities."

Although pleased that the "scary environment" seems to be passing, Edward Yardeni, chief economist at E.F. Hutton & Co. Inc., said the "risks are reducted but not eliminated." The collapse of the Penn Square bank and several brokerage firm failures caused the Fed to ease interest rates quickly, Yardeni said, because the Fed saw the potential for something worse. And that is not a comforting thought.