Dow, Nasdaq bounce back

Wall St. fears ease as markets rebound from Friday free fall

A topsy-turvy session

Nasdaq index makes biggest point gain, but most stocks drop

April 18, 2000|By William Patalon III | William Patalon III,SUN STAFF

Wall Street recovered yesterday -- at least temporarily -- from one of the worst weeks in its history in a topsy-turvy trading session that saw the Nasdaq composite index finish with its biggest point gain ever.

It was a much better day than many had feared. Some market experts had predicted a continuation of the bloodletting on Friday, when the Dow Jones industrial average and the Nasdaq suffered their biggest point drops ever. But even with the gains, experts said, there are no guarantees that the carnage is finished.

"It's a little more relaxed today," said Morry Zolet, a senior vice president of investments at Ferris Baker Watts Inc. in Baltimore. "But it's still a little premature to say it's over."

The Dow Jones industrial average rose 276.74 points yesterday, to close at 10,582.51. At its low, the 30-stock blue-chip index was down more than 70 points. The Nasdaq followed suit, gaining 217.87 points, or 6.56 percent, to end the day at 3,539.16. Last week the Nasdaq fell 25 percent, the largest drop in its 29-year history, including a 355-point drop Friday while the Dow plunged 7.3 percent.

Volatility ran high yesterday. Even though the Nasdaq had its biggest point gain -- and its second biggest percentage gain -- more stocks fell in price than rose.

So what's an investor to do? One age-old Wall Street aphorism says investors should never "reach for a falling knife," meaning that it's fruitless -- and dangerous -- to buy stocks when they're in a steep decline.

Even if it means missing out on the earliest gains, it's better to stay on the sidelines during the worst part of a bear market, and to remain on the sidelines until stock prices clearly have turned for the better, some investment advisers counsel.

It's not yet clear whether that has happened. Yesterday's increases in the two key indexes could just as easily be "bear-market rallies" -- that is, little more than a brief respite from a

Reasons for optimism

Still, there are reasons for optimism, many experts said. The economy remains strong, as do corporate profits. Yesterday, Eastman Kodak Co., Ford Motor Co. and Eli Lilly & Co. reported earnings that exceeded Wall Street expectations.

Because a robust economy and improving corporate profits are usually the key ingredients of rising stock prices, several influential market strategists predicted yesterday that share prices will rise.

Wall Street strategists Thomas Galvin of Donaldson Lufkin and Jenrette Inc. and Thomas McManus of Banc of America LLC said stocks have gotten so cheap after the recent sell-off that investors should boost stocks as a percentage of their overall holdings.

Galvin says investors should boost stocks to 90 percent of their portfolio from his earlier suggested weighting of 80 percent. McManus boosted his recommendation to 80 percent from 75 percent.

Abby Joseph Cohen, a Goldman Sachs market strategist who might be the most influential on Wall Street -- and the biggest bull -- said the broader Standard & Poor's 500 index should reach 1,575 by the end of the year and 1,625 in 12 months as stocks rebound.

From Friday's close, that would require increases of 15 percent by the end of the year and 20 percent by tax day 2001. The S&P 500 closed yesterday at 1,401.44, up 44.88 points.

The slide in stock prices "appears to be driven by market factors rather than changing fundamentals" such as falling sales or profits among the companies, Cohen said.

Knowing when to buy

Many other analysts remain convinced that stocks have more room to fall, and they are warning investors to stay on the sidelines and protect their money.

For those who still want to venture into stocks, the trick becomes knowing when to buy anew. Zolet says investors should look for broad market advances and strong trading volume. That's not what happened yesterday. At one point during the day, two stocks were falling for every one that was rising on the New York Stock Exchange.

More than ever, individual investors need to have a long-term view, which will help them ride out the market's continued choppiness, said Lyle K. Benson, president of L.K. Benson & Co., a financial-planning business in Towson. Investors must re-examine their investment goals, understand when they expect to need the money and decide how much risk they can comfortably take on, he said.

"They need to be able to sleep at night," said Benson, who thinks the stock market will remain as volatile as it is now.

Investors should focus more on high-quality stocks, companies with strong brand names and good businesses that generate growth in sales and profits, experts said.

The Internet legacy

The decline of the once high-flying Internet stocks might be the most significant legacy of last week's rout, they said.

"You won't see those second- or third-tier technology companies getting so far ahead of themselves in the future," said Eugene E. Peroni Jr., director of equity research at John Nuveen & Co. in Radnor, Pa.

Investors should be compiling "wish lists" of stocks they want to buy, Zolet said. Instead of buying a big block of shares in each of those companies, investors might want to decide how many shares of each they ultimately would like to hold. Then they can buy a small lot of those shares now, adding to the position as time and money permit. That would keep risk down, which investors understand is crucial right now.

"People have seen the damage" that can be caused by over-speculation, Zolet said. "They're pretty blown away."

Wire services contributed to this article.

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