THE MARKET FLASHED A MESSAGE LAST MONTH: STOCKS ARE BACK IN FAVOR.

The New York and the American Stock Exchange indexes, the NASDAQ composite index of over-the-counter stocks and the Dow Jones transportation average climbed to all-time peaks in the first half of February. Trading volume from Jan. 1 to mid-February smashed records, averaging more than 50 million shares a day on the New York Stock Exchange alone. While many analysts expected prices to pull back temporarily, they agreed that investors were flocking back into the market. Says David Bostian Jr., head of his own counseling firm, Bostian Research Associates: “Institutions have been switching out of bonds into equities. They’ve been following the lead given in December by General Motors, which instructed the managers of its $8 billion pension fund to raise the proportion in stocks from 53% to 70% by March.” Bostian adds that 1978 legislation lowering the tax rates on long-term capital gains has led to “a new blooming of interest in stocks among individuals.” Evidence of this comes from the National Association of Investment Clubs ; from November through January it received 8,000 inquiries from small investors wishing to start clubs, vs. 1,400 a year earlier. Says Dave H. Williams, chairman of Alliance Capital Management: “Investors have learned that bonds are poor holdings in times of high inflation. Stocks are back in favor as an inflation hedge.”

Bond prices took a brutal beating last month. The cause: fears that increased defense expenditures and continued strength in the economy would prevent the long-expected easing of inflation. Bond yields (which rise as prices fall) surged to historic highs — 11.84% on a new 30-year Treasury bond and 12.02% on a 7 1/4%-year Treasury note. Some economists, among them Kidder Peabody’s Sam Nakagama, think that interest rates could go even higher. “Bonds still look bad,” concludes the advisory service Income Investor.

A LEADING PRO THINKS GOLD’S PRICE WILL SEESAW BETWEEN $630 AND $730 AND ITS NEXT ADVANCE WILL LIFT IT TO $920 OR HIGHER.

Intense anxiety about the Middle East will prompt continued heavy buying of gold by Arabs and Europeans, says James Sinclair of Sinclair & Co. His firm’s mining shares specialist, John Crowley, believes that the stocks with the largest profit potential are those of the high-cost South African mining companies, because their earnings rise steeply when the gold price climbs. One of Crowley’s favorites is Leslie (recently traded in the London market at $3.50, and available through most U.S. brokers); its next semiannual dividend could be 23¢. Two others are Grootvlei (OTC, $8.75) and Welkom (OTC, $15.25), which will pay semiannual dividends of about $1 each, Crowley estimates. If gold falls, he warns, these stocks will plummet.

SILVER MINING STOCKS, TOO, SHINE BRIGHTLY.

Although these stocks have shot up, their gains haven’t kept pace with silver’s rise from $7 an ounce a year ago to its recent price of $36. The outlook for silver remains bullish unless political tensions ease. Says J.P.

Ingersoll Jr., who follows metals stocks for E.F. Hutton: “Silver moves with gold, gold moves with fear, and fear depends on what the Russians do.” Last month he was still recommending Asarco (NYSE, $52.50) and Hecla Mining (NYSE, $43). He estimates that Hecla’s 1980 earnings, which will be lightly taxed because the company can deduct some losses from 1978, could be $12 a share, and he considers Hecla a likely takeover target. The Value Line Investment Survey likes Asarco, Hecla, and also Callahan Mining (NYSE, $42.75). Analysts advise investors to buy silver stocks during their periodic sinking spells, caused by what cynics call “peace scares.”

A SERVICE THAT SEEKS OUT “AMERICA’S MOST UNDISCOVERED COMPANIES” HAS A NEW FIND.

The stocks of 16 such companies recommended since last May by Smart Money were recently up on average more than 80% from their prices when they were picked. One of last month’s recommendations was Scriptomatic (OTC, $9.50), a Philadelphia-based company with overseas subsidiaries that market in 43 countries. Scriptomatic has achieved a glittering growth record in the prosaic business of making envelope-addressing machines for small-volume users. In recent years earnings have increased at a compounded annual rate of about 40%, to $1.73 per share in the 12 months that ended Sept. 30, 1979.

A NEW FUND SEEKS TO BEAT INFLATION BY COMBINING COMMODITY FUTURES WITH BONDS.

The Income & Price Index Fund won’t try to guess which commodities will do best; it will invest in a specific mix of 16 of them (including cattle, copper, corn, gold, hogs, silver, sugar and wheat) chosen because their combined price changes should roughly match the changes in the producer price index (formerly the wholesale price index). The commodities will be bought on margin, with the fund putting up $8.50 for every $50 invested in futures contracts. This leverage should produce large gains in periods of sharply rising inflation. On the other hand, the fund’s losses in commodities when inflation is declining will be hedged by its bond holdings, which will then rise in price. The manager of the IPI fund, first of its kind, is the Boston Co.; the minimum initial purchase is $1,500, which includes a 7 1/2% sales commission. The shares, recently offered at $15 by Shearson Loeb Rhoades and Thomson McKinnon Securities, can also be bought through other brokers.

WHITTAKER CORP. HAS TRANSFORMED ITSELF FROM A HODGEPODGE CONGLOMERATE INTO A LEADING SUPPLIER OF MEDICAL CARE TO DEVELOPING COUNTRIES.

Donald I. Trott, research director of A.G. Becker, recently recommended Los Angeles-based Whittaker (NYSE, $24.50), observing that its story is “a chronicle of outstanding corporate achievement.” Under a new president recruited in 1970, Whittaker sold off a slew of subsidiaries and redeployed the proceeds in promising growth areas. Trott estimates that $480 million of the company’s expected 1980 revenues of $1.4 billion will come from its Life Sciences Group, which operates hospitals in Saudi Arabia and Abu Dhabi. It has no assets in these countries and receives its fees before its services are performed, so it doesn’t run the risk of direct loss from adverse political developments. Whittaker’s other major divisions produce railroad boxcars and coal-carrying equipment, paints, luxury pleasure boats and equipment for the aerospace industry. Earnings jumped from $2.12 per share in 1978 to $3.10 in 1979 and Trott estimates that they will rise to $4 this year and $4.80 next. The company plans to buy 1 million of its own shares in the open market, an indication that it considers its stock undervalued.