Their confidence undermined by the collapse of their favorite stocks last October, to say nothing about the destruction of pet theories, some analysts are reaching into history for guidance. And those who do so have a tendency to remain bearish. The reason for this isn't difficult to discern, because a retracing of prior declines, such as in 1929, isn't unusual for subsequent rallies. Often, however, those rallies lead only to further collapses. At its post-crash high of 2,072 points a week ago, the Dow Jones industrial average had risen more than 320 points, or 20 percent, from its Oct. 19 bottom of 1,738. The comparison with 1929 is as hard to avoid as it is painful to recall. Four-and-a-half months after the debacle of October 1929 the industrial average had recovered 43 percent of its late 1929 decline, and a bit more than one month later it reached its high for 1930. But, Wright Investors' Service reminds us, ``within seven months all of that recovery was lost, and the downward spiral which would last until July 1932 was resumed.'' While the year 1929 is imprinted on every schoolkid's mind, the further collapse from early 1930 to mid-1932 was several times larger, and at some points along the way the descent was just as precipitous. But history can also be a treacherous guide; while it teaches, it can deceive, too. The years 1929 and 1987 have certain similarities, especially in regard to economic excesses, but the differences are probably more numerous. To begin with, the economy currently shows few signs of collapse, even in spite of some enormous and unpredictable excesses in matters such as budget deficits, credit extension and trade balances. Wright and others point out that today's economy is still creating jobs at a strong level, the service sector is growing, manufacturing has been gaining strength, and after years of decline the nation's exports are increasing. There are few signs of recession. The Conference Board economic model released today shows gross national product rising only 2.1 percent this year, compared with 2.9 percent in 1987. That's anemic to be sure, but still growth. Albert T. Sommers, economic adviser at the board _ an independent group supported largely by business _ says the economy has simply entered an inevitable retrenchment, ``but does not seem poised for a recession.'' In the market itself there are signs of heightened activity, especially regarding stocks of companies that are takeover targets. Merger mania has gripped the marketplace once more, and some of the premiums offered for companies seem beyond reason. Less obvious, however, have been areas of underpricing in the market. Business Week magazine calls the over-the-counter market, where many smaller companies are traded, a bargain-hunter's paradise for undervalued shares. These stocks, some of which could be tomorrow's blue chips, failed to rise to the sky during the industrial average's long ascent. Moreover, they fell more sharply than blue chips during the October collapse. Now, many of these stocks are selling far below their net cash value and so have begun attracting the interest of what Wright suggests are rather sensible investors. It might, says John Wright, be a good sign for the entire market. While conceding that such activity might not continue, it suggests to him that for the moment, at least, ``rational investors are regaining some control of the market.''
