The Dow is moving in mysterious ways

March 03, 1994|By Bloomberg Business News

NEW YORK -- These are times to make investors wish they had the courage to buy and hold.

Trying to guess at the markets' short-term moves is always a job best left to professional traders. These days, with the Dow Jones industrial average moving in 50-point gulps and government bonds moving one point in a heartbeat, it's particularly dangerous.

Take yesterday. Early in the day, the Dow industrials fell more than 50 points as investors here and abroad continued to worry that interest rates would rise, making stocks and bonds less attractive.

"This fear of higher interest rates is catching all around the world," said Peter Cardillo, research director at Westfalia Investments.

Many investors may have decided it was time to bail out of stocks, especially after hearing that Lehman Brothers analyst Elaine Garzarelli had scaled back her optimistic view of the market because short-term interest rates had climbed. Ms. Garzarelli is the one who predicted the 1987 stock crash, remember.

But anyone who sold before about 11 a.m. yesterday may have made a mistake. The Dow Jones industrials turned around, made up all their losses and closed the day with a gain of 22.51 points to close at 3,831.74. About 363.7 million shares changed hands on the Big Board.

"This was the biggest one-day reversal in stock prices we've tracked since Jan. 2, 1992," said Philip Smyth, market analyst at Birinyi Associates Inc.

In the broader markets, the Standard & Poor's 500 Index climbed 0.37, to 463.81, after falling as much as 6.95 points earlier in the day to a low of 457.49.

The Nasdaq index slumped 5.17, to 783.47, led by weakness in computer-related issues.

The American Stock Exchange Market Value Index shed 3.64, to 466.32. On the New York Stock Exchange, 12 common stocks fell for every seven that gained.

The Dow's turnaround made planning difficult. For example, an investor who had been playing Ford shares because of the car industry's rising sales might have been discouraged when the stock opened at $62 and then dropped a dollar. But selling around the day's low of $61 would have been a mistake. The market's turnaround pulled Ford up to $63.875.

If interest rates really are going to rise, bonds soon might be a better bet than stocks because of their higher yields.

"This isn't happening yet, but people are definitely starting to talk about" moving into bonds, said Anthony Conroy, head trader at Mabon Securities Inc.

But yesterday was the wrong day to time a move into the bond market. The benchmark 30-year U.S. Treasury bond fell in

overseas trading during the night and was on the downside in the early going in New York.

Buying then looked smart as the bellwether bond wiped out its overnight loss. For a while. Then the bond dropped about 3/4.

Investors are getting accustomed to the markets' volatility. Stocks and bonds rallied for three years as interest rates fell. Then, on Feb. 4, the Federal Reserve raised short-term rates for the first time in five years. The Dow average fell 96 points that day and sent the benchmark Treasury bond into a three-day slump.

The Dow average is now down 3.7 percent since hitting a record 3,978.36 on Jan. 31. Is this the beginning of a decline of 10 percent or so that some analysts say the market needs to keep it realistic? Or are prices already more reasonable?

The stocks in the Standard & Poor's 500-stock index now trade at about 21 times their earnings, down from about 24 times several weeks back.

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