A dizzying ride on Wall Street roller coaster

Dow, Nasdaq close with modest losses after record swings

More gyrations expected

April 05, 2000|By William Patalon III | William Patalon III,SUN STAFF

The Nasdaq composite index took technology-stock investors on a ride yesterday that made Coney Island's vaunted Cyclone roller coaster seem tame.

The index fell nearly 575 points, or 13.6 percent, by early afternoon, and spent the rest of the day in a rise-and-fall pattern that ended with the Nasdaq down a modest 74.79 points, or 1.77 percent, at 4,148.89. The midday point drop was the biggest ever for the index, which is dominated by technology stocks.

The Nasdaq, which at its March 10 record high was up 24 percent for the year, is now up 2 percent for the year after a sell-off that started a week ago.

Blue-chip investors had a similar case of the jitters. The Dow Jones industrial average, which had dropped almost 504 points by early afternoon, finished the day at 11,164.84, down 57.09 points, or half a percent.

"It's been insane, absolutely crazy," said Morry Zolet, a senior vice president of investments at Ferris Baker Watts Inc. in Baltimore who said he spent the entire day on the telephone with clients, speaking with 85 of them.

The Nasdaq and the Dow recorded their widest point swings in history on record volume. From its high to its low, the Nasdaq moved more than 634 points. The Dow, which was up more than 196 points in the morning, swung more than 700 points during the day.

In a long-running bull market that has been dominated by high-tech stocks for the past few years, volatility has become the name of the game. Even so, many veterans of the investment business say they had never before seen swings like yesterday's.

Momentum investing, the trading style many investors have embraced, could be a catalyst for the wild gyrations yesterday. Traditional market wisdom counsels investors to buy low and sell high. But momentum investors aim to buy high and sell higher, and they prefer stocks that are on the run, market analysts say.

That approach to trading is a big reason for the Nasdaq's 86 percent rise last year and its double-digit gains in less than three months this year. But momentum investors often care little about the company's sales or profitability, instead believing that action in the stock is the key to making money in the market, analysts say. That makes them fickle and often prompts them to sell a stock as soon as the action stops, or at the first sign of trouble with the stock or in the broader market.

Analysts such as Richard Cripps, chief equity strategist for Legg Mason Inc. in Baltimore, say that momentum-led markets can turn ugly fast: Investors who paid dearly for a stock aren't going to hesitate to dump it when the share price heads south.

"They're simply unwinding the momentum in the Nasdaq we've seen in the last five months," Cripps said as he watched the Nasdaq gyrate yesterday. "My sense is that this isn't over yet."

Another possible culprit is margin buying, or using borrowed money to buy shares, said Gil Knight, a principal of Allied Investment Advisors in Baltimore. Margin debt has reached a record in recent months, is seen as a possible sign of a market mania, and can exacerbate any sell-off when investors get "margin calls" -- that unwelcome news from a broker who tells the investor to either pony up more money or face having the stocks sold. The reason is that securities regulations prohibit debt from swamping equity in a brokerage account.

But that can force sales, which can steepen the market's descent in an ugly sell-off. Margin buying was also mentioned as a concern by Federal Reserve Chairman Alan Greenspan in a letter to Congress last week.

Charles Schwab Corp., the No. 1 U.S. discount broker, saw margin calls yesterday "running at twice normal levels," said spokesman Dan Hubbard.

Some investors are suddenly waking up to the fact that many of the hot new technology companies make no money -- and have no profits in sight, market-watchers say. Earnings are supposed to be what drives stock prices, but they can cease to matter in a momentum, or speculative, market. But this speculative atmosphere -- sometimes known as a "bubble" -- may be ebbing quickly, prompting investors to again focus on the shares of profitable companies, said a Washington portfolio manager. "The euphoric phase of the market is over. Now we'll move onto the next phase," said David L. Straus, a senior portfolio manager for Johnston, Lemon Asset Management in Washington, D.C.

Though the Dow finished down slightly yesterday, analysts say investors are clearly continuing to take profits in their technology holdings, reinvesting the money into "safe" blue-chip shares. Safety isn't the only appeal of blue-chips -- they're viewed as cheap, too, since many were beaten down from their highs. That's a big reason that so-called "Old Economy" stocks are climbing lately as their "New Economy" counterparts keep falling.

Yesterday, computer-related stocks like Microsoft Corp. and telecommunications companies like JDS Uniphase Corp. led the Nasdaq decline as investors kept buying into consumer-products firms like Procter & Gamble Co. or companies such as Johnson & Johnson that make health care products. "As hard as it is to believe, this is a good thing," said Pete Anderson, chief investment officer at American Express Financial Advisors in Minneapolis. "One sector of the market was insanely overvalued. The rest was deeply undervalued. Now we are reversing that."

Wire services contributed to this article.

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