Wall Street Girds for What Happens Next

No big deal or look out below?

Wall Street opens today with Friday’s 247.37-point dive in the Dow industrials fresh in many investors’ minds, but with no consensus as to the market’s likely course.

Plenty of analysts believe that major stock indexes are primed for a pullback of at least 10% after their stunning surge of the last 3 1/2 months. With Friday’s 3.1% drop to 7,694.66, the Dow is already down 6.8% from its record high reached Aug. 6.

But some market technicians say Friday’s decline was fluky, occurring on only moderate trading volume. They say that may mean little follow-on selling today.

Not counting Friday’s slump, the Dow has closed down more than 100 points on nine days this year. In all but two cases, the Dow rebounded in the following session.

Whatever happens today, Wall Street pros say the market’s trend in coming weeks may depend on these factors:

* Will the bond market find a reason to rally? Long-term yields have risen moderately since July 31, despite generally favorable economic data. If yields were to slip back soon, that could help bolster stock prices.

But there are relatively few economic reports due out this week, which may leave bond investors in a vacuum with little reason to bid yields lower.

The Federal Reserve Board meets Tuesday, but it is expected to leave short-term rates unchanged--and then end its meeting without comment, as usual.

* Can smaller stocks continue to outperform blue chips? The Dow sank 3.1% on Friday, but the Standard & Poor’s index of 600 small stocks lost less than 1%. Since May 1, smaller stocks have performed better than blue chips, overall--yet the Dow still is up 19.3% year-to-date, while the S&P; small-stock index is up 16.8%.

Many analysts have been arguing for some time that big blue-chip stocks have become overvalued, especially relative to smaller issues. It was Gillette Co.’s announcement Friday that 1997 and ’98 earnings growth will be slightly less than expected that helped trigger the sell-off in the Dow and other blue-chip indexes.

If smaller stocks can hold up better than blue chips this week, that could help stabilize the market sooner by giving investors a new sector on which to focus.

* Will declines in foreign markets bring money back to the U.S. market? Measured in native currencies, many European and Latin American stock markets have shot up far more than the U.S. market this year, and they’ve been powered in part by American cash.

But the big gains in those foreign markets could make them more vulnerable to profit-taking if the U.S. sell-off spreads. If money comes back to U.S. shores, some of it might be pushed into declining U.S. shares or into U.S. bonds.

In late trading today in Asia, Japan’s Nikkei-225 stock index was down 1.9% to 18,959, while Australia’s key stock index fell 2.1% to 2,610 and Singapore’s index fell 2.2% to 1,912. Damage was worse in smaller markets: Indonesia’s main index was off 6.1% to 580; the Philippines’ key index dropped 4.7% to 2,333.

The dollar’s trend also will be key. It has slumped versus European currencies in recent days. A weaker dollar would give foreign owners of U.S. shares more reason to sell to avoid devaluation.

* Will the United Parcel Service strike end with a deal that appears to gut the company’s profitability? Many economists believe the strike could herald a turn in the 1990s trend of greater corporate efficiency, often at workers’ expense. If a settlement hurts UPS, it could raise questions about long-term U.S. corporate profit growth in general, chipping away at a key prop for the nearly 7-year-old bull market.

* Will mutual fund investors step up their selling? U.S. stock funds overall had net outflows in the week ended Thursday, according to money-flow tracker Market Trim Tabs newsletter. Typically in market pullbacks, fund redemptions have risen and new purchases have slowed until stocks have stabilized.

This time, some analysts worry that more fund investors may be tempted to sell because of the new tax law, which reduces the top capital gains tax from 28% to 20%.

* Will the New York Stock Exchange’s market-closure rule be tested? If the Dow falls 350 points in one session--a 4.5% drop at current levels--the NYSE will halt trading for a half hour. That rule, put in place after the 1987 market crash, has never been tested, and analysts are uncertain whether it would help calm the market--or just make matters worse.