Some see some upside in static market if investor skittishness should give way

If the stock market appears locked in stone these days, with the Dow Jones industrial average more or less staying in the 2,100 range, that may not necessarily be bad, as underscored by what didn't happen with the release of the latest report on the United States trade deficit. The report, which came out late last week, showed a widening deficit of $12.1 billion for August, up from $9.4 billion the previous month. In mid-October 1987, an adverse August trade report helped send the stock market into a steep tailspin, from which it has yet to fully recover. Yet last week's report was taken with a shrug and a ``so what'' from a wary Wall Street investment community that seems less than inclined to break free from the trading rut the market has found itself in over the course of the past several months.

``You just can't run a multitrillion-dollar stock market on monthly numbers,'' says Larry Wachtel, an analyst with Prudential-Bache Securities. ``If you go that route, all that the market becomes ... is a big trading horse bet.'' Indeed, investors were quick to discount the adverse trade deficit numbers late last week, even before the trade report came out Thursday. Thus the market tumbled 30.23 points on Wednesday, showing that investors were discounting the coming trade report, says Mr. Wachtel. And the proof of that offsetting came the next morning, Thursday, when the market opened with a gain of 8 points.

Wachtel says that numbers by themselves, whether they are trade report figures or unemployment statistics, often ``tend to be aberrations. They come and go. They are often revised. And they carry many qualifications. They do not lend themselves to a comprehensive long-range view'' of the underlying forces governing the stock market or the economy, he says.

``Investors have become so preoccupied with risk aversion that they are ignoring the potential for significant reward in the market,'' says D.Larry Smith, director of research at Smith Barney, Harris Upham & Co.

Mr. Smith, like Wachtel, contends that it is time to look away from any one set of economic indicators to attempt to measure or anticipate the future course of the market. ``On a historical basis, the stock market and the bond market are winners. Yet, people often erroneously view these markets as gambling markets, instead of a clear investment opportunity over time.''

Smith is also concerned about the pitfalls of putting too much reliance on any one investment strategy.

``There's a mania for holding cash right now,'' he says. ``But whenever there's a concerted effort based on any mania, the investor is operating on dangerous ground.''

Smith, perhaps something of a contrarian himself, argues that in the short run the market tends to move in the direction opposite to the majority opinion. And since the consensus now seems to call for higher interest rates and a flat-to-declining market, the market will probably go in just the opposite direction, he says. Even looking beyond the short term, he says, it is historically certain that over time the market consistently rewards the patient investor.

Nor is the reward meager. Given a long-range perspective, Smith says, the market tends to provide a total return of between 4 and 5 percent over inflation. The same long-range return holds true with bonds, he says. Given inflation of about 4 percent and long rates on bonds of around 9 percent, there is a return of 5 percent or so, which, he says, is ``very attractive.''

But his call for a return of the small investor continues to be ignored. Thousands of investors fled the market after last year's tailspin. Indeed, trading tends to stay in a rut - the iron trough noted above of about 2,100 points, with no apparent breakout on the horizon. Last week the Dow industrials closed down 17.07 points, at 2,133.18. Much of the trading that did occur was related to takeover efforts, although some high-tech stocks - including Digital Equipment, IBM, Compaq, and Motorola - posted some modest gains.

One trading area that may warrant special selectivity at present, given continued economic uncertainty and the flight of investors from blue-chip and big-company stocks, involves so-called ``small cap'' companies. These are companies with small capitalizations, ``such as $500 million or less,'' says Peter Thompson, a market strategist with Kidder, Peabody & Co. Small-cap firms, which tend to trade on the over-the-counter market, are generally believed to do particularly well during periods of sustained or rapid economic growth.