How now Dow Jones?

Back in August, when the Great Bull Market was five years old, everyone was asking, "Where's the top? Where will it end?"

On Oct. 19, when the market plunged, they found out.

Now investors are asking: "Where's the bottom?"

So The Washington Post asked a group of Wall Street analysts for their views on the expected behavior of the 30-stock Dow Jones industrial average, that most closely watched of all stock market indicators.

In essence, most of the analysts believe that when it comes to a market collapse, it isn't over until it's over. And the chances are, they think, that it's not over yet.

Here's a summary of their views:

Richard T. McCabe, manager of market analysis for Merrill Lynch in New York, said the market has reached its "near-term bottom" and will return there after a short rebound.

When the Dow dropped from its all-time high of 2722 on Aug. 25 to its low of 1738 on Oct. 19, it represented a drop of almost 1,000 points. McCabe said he believes the Dow will regain about 500 of those points and rise to 2100 to 2200 level by late January or early February.

"Following that, there will be some unfinished business on the downside and there will be a relapse," McCabe said. The relapse, he said, will take the Dow down to between 1700 and 1800. "That will be the tag end of the corrective process."

The retesting is likely to occur in late winter or early spring, McCabe said, and will set the stage for a new bull market.

Merrill economists do not expect a recession next year, McCabe said, but they predict a decline in the gross national product in the first quarter. (Generally, GNP must decline for two quarters before economists recognize a recession.) Thereafter, they see a gain in the second quarter and, finally, a 1.5 percent gain for all of 1988. Interest rates are expected to fall moderately in the first half of the year and rise moderately in the second half, winding up about where they started, McCabe said.

"We've already seen the low point when the Dow dropped to 1738 on Oct. 19," said Charles S. Comer, a technical analyst for Moseley Securities in New York. The market came within 28 points of testing that low on Dec. 4 and and could test it again, Comer said. But he finds it encouraging that, two months after the market's collapse, the Dow is about 200 points higher than it was when the market fell.

It was the drop in oil prices early last week that powered the most recent stock market rally, and helped offset the weakness of the dollar, Comer said. "I'm grateful for the rally even if it was temporary. It proves we are not going to hell in a handbasket."

Comer said he looked for the market to back-and-fill in the next several months as it builds a new base. The longer it takes, he said, the stronger the base will be. Comer said he is watching for the Dow to return to 2030, its highest rebound point after the Oct. 19 plunge.

"A move through 2030 would suggest that we are going higher," Comer said. By higher, he means about 2300 on the Dow.

Comer also said he expects long-term interest rates to fall to 8 percent from the current 9 percent within the next 12 months. As for a recession, he said, "We'll probably go through an economic slowdown next year but it won't be a recession in the strict definition."

"I'm a long-term bull," said Philip B. Erlanger, chief technical analyst for Advest in New York. "I'm still looking for 3500 on the Dow in 1989."

Erlanger believes the Dow isn't likely to go any lower than it did on Oct. 19. He based hi belief on chart studies that show most bull markets have retraced their steps by about 50 percent.

"Never has one support level had so much significance to long-term stock market potential as does the Dow 1700 level," he said. "The low 1700s represent approximately a 50 percent retrenchment of the bull move from August 1982 to August 1987. The perpetuity of the long-term super bull cycle would be greatly diminished if this level fails to hold."

Erlanger said he expected the Dow to close over 2000 by the end of the year and doubted that it would be derailed by economic problems. "Gloom and doom is just not justified," he said. "The economy is not in jeopardy."

The stock market is going to go higher over the next several months, but then it will turn lower in midyear, said Ralph J. Acampora, a technical analyst for Kidder, Peabody in New York. "I think you've seen the worst for the time being," he said.

Acampora said he expects a short-lived rally to take the Dow up to the 2200 or 2300 level by March or April. But he also believes the Dow will slide sharply again in about six months, as the market retests its lows at the 1738 level and, he hopes, establishes a "major bottom."

"We're going to have some aftershocks in about five or six months," he said.

The short-term rally Acampora expects is based on the cathartic effect of the Oct. 19 plunge. "We've aired out a lot of our problems. That's not to say we've solved our problems. But I don't think there are any surprises out there. The one thing investors don't like is surprises."

Longer-term, Acampora recalled that in the 1962 downturn the market "treaded water" for 20 weeks, as it did for 17 weeks in the 1966 crash. Only eight weeks have passed since the 1987 collapse, leaving ample time for the market to confirm its low point, he said.

As a result, Acampora said, "It is dangerous to be an investor who is looking out more than 12 to 16 months. You have to be a lot more sensitive to the shorter term."

"My short-term outlook is for the market to continue to move higher," said Eugene E. Peroni Jr., director of technical research for Janney Montgomery Scott in Philadelphia. But he thinks the rally will have a short life.

Stocks rose recently after a successful Dec. 4 test of the Dow's Oct. 19 low of 1738, Peroni said. The Dow dropped to 1766 but did not go below it, encouraging domestic institutional investors to come in and do some buying, he said. "But," he added, "I'm skeptical that it is anything more than short-term buying. Institutions are hesitant to hold positions for any length of time."

He said the rally was taking place without any improvement in the economic, monetary and political arenas.

Peroni said the "rally window" would extend into February and take the Dow up to 2200. After that, he expects the market to slide again for a test of the 1575 to 1625 range in mid-year. The depth of the drop may depend on increases in dividends among the major corporations. If dividends rise substantially, Peroni said, the market might not fall below 1600.

If the return to lower prices establishes a new bottom for the market, Peroni said, he expects to see the rebirth of a bull market next year, but in a mildly recessionary climate.

"We're in a primary bear market and bull markets often are born out of recessionary economic environments," Peroni said.

"The pressure is on the downside," said Philip A. Cannistraro, chief investment officer at Amivest Corp. in New York. Cannistraro thinks the market is locked into a trading range on the Dow of between 1700 and 2000 for the next few months. But he believes that if the Dow breaks through the 1700 mark, it will head back to the 1300 to 1400 level, which he called "the next stopping point."

At that point, Cannistraro said, "We would be aggressive buyers."

A key reason for the market breaking through the 1700 level, Cannistraro said, would be the "relentless pressure on the dollar" that could force an increase in interest rates and could lead to new inflationary pressures. Both are bad omens in the stock market.

If there is a recession, Cannistraro said, it is not likely to come until late in 1988 or early 1989.

"The economy will not roll over into a recession in early 1988," he said. "The reasons are that the liquidity being supplied by the Federal Reserve and the current momentum within the economy will sustain economic activity through the first half of 1988." But later in the year, he believes, pressure from the lower dollar and higher interest rates will stimulate inflation and ultimately send the economy into a recession.

Cannistraro said high volatility had changed professional investors' view of the market. "You never really have a chance to put a strategy in place. It is forcing institutional managers to trade the market," he said.