DOW'S REBOUND PUZZLES ANALYSTS.

Byline: Jonathan Fuerbringer The New York Times

The Dow Jones industrial average jumped more than 27 points Wednesday, bringing it within a whisker of its record 5,778 close on May 22 and nearly completing a recovery that wiped out its 6.7 percent decline in July.

But the return to near-record levels is mystifying some stock strategists because market conditions - higher interest rates, modest earnings growth, expectations of higher inflation and the slowing of cash inflows into mutual funds - are not as positive as they were in May. There also is a prospect of a modest raising of interest rates by the Federal Reserve Board.

None of these factors by itself would be likely to undermine the market, but they are all coming together at the same time. Nevertheless, the Dow has rebounded.

``All the variables that helped the market are less vigorous,'' said Michael Metz, chief investment strategist at Oppenheimer & Co. ``So I am amazed that the market has held up so well.''

One reason for the rebound, which also has brought the broader Standard & Poor's index to within 1.7 percent of its closing high, is that the sentiment of the bull market persists.

This sentiment, said Byron Wien, U.S. investment strategist at Morgan Stanley & Co., moves investors to ``see every dip as an opportunity to buy.''

That investor persistence was reflected again Wednesday in the Investment Company Institute's estimate that stock mutual funds took in a net $19 billion in cash in August, more than triple a revised $5.8 billion in July, when a plunge, particularly in smaller stocks, scared some investors.

In this bull-market view, many uncertainties that have made stocks volatile this summer still are seen through rose-colored glasses.

A strong jobs report for August becomes a reason for a rally, not a sell-off, and there is a discounting of the inflationary pressure that some economists see.

Similarly, the bullish investors even allow modest earnings expectations - 10 percent growth in 1996 - to support confidence in stocks despite a rise in interest rates since 1996 and despite the clear threat that the Fed's policy-making committee will raise rates further at its meeting Sept. 24.

``In a bull market we look at all of these uncertainties in a glass-half-full, positive way,'' said Alfred Goldman, director of market analysis at A.G. Edwards in St. Louis.

But looking inside the Dow shows that the return to its May high may reflect less optimism than investors felt in May.

Among the 30 Dow stocks, the issues that recently have done well include Coca-Cola and Merck, neither of which is likely to see revenues fall sharply in a recession, while the worst Dow performers over the period include General Motors and Goodyear, both highly vulnerable to a recession.

And while the Dow and the S&P are doing well, many other indexes that reflect the performance of smaller stocks or specific sectors of the economy are not keeping up. The Nasdaq composite index is still 7.6 percent below its record, and the Chicago Board Options Exchange gaming index, which tracks the performance of the casino sector, is 23.8 percent below its peak.

``The big stock indexes are doing better than the average stock,'' said David Shulman, chief equity strategist at Salomon Brothers.