Dow Jones flirts with bear territory

Late-session rally helps blue chips avoid 20% decline

March 23, 2001|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

The Dow Jones industrial average needed a late-session rally yesterday to narrowly avoid finishing the day in bear market territory for the first time since 1990.

The Dow fell 97.52 points to close at 9,389.48, putting the index of 30 blue-chip stocks down 19.9 percent from its closing high in January last year. A decline of at least 20 percent is considered a bear market.

Earlier yesterday, the Dow had been off by more than 380 points.

Both the technology-heavy Nasdaq composite index and the Standard & Poor's 500 index, a broader measure of market performance, are officially in bear territory. The Nasdaq is down 62.4 percent from its closing high of March 10, 2000. The S&P is down 26.8 percent from its closing high of March 24, 2000.

The Nasdaq, which at one point yesterday was down 36 points, rallied in the last 90 minutes on a buying spree of beaten-down semiconductor, computer and software stocks to finish at 1,897.70, a gain of 67.47. The S&P 500 fell 4.56 points to close at 1,117.58.

"Maybe there's a sense that we're reaching a bottom," said Michelle Clayman, chief investment officer at New Amsterdam Partners.

Some analysts have been looking for big trading volume - to go along with the big declines - as a sign that the market has hit bottom.

More than 1.7 billion shares changed hands on the New York Stock Exchange yesterday, the exchange's third-busiest day, compared with a daily average of 1.2 billion for the first two months of this year.

"That's pretty hefty," said Andrew M. Brooks, head of equity trading for T. Rowe Price Associates in Baltimore. "People are involved."

Said Hugh Johnson, head of the investment policy committee at First Albany Corp.: "Most of the day it looked very much like a capitulation. [There was a] sense of resignation, despair and fear. These are all characteristics of bear market bottoms. Traders and professional managers saw these and decided this is a buying opportunity."

But Mickey Misera, head of equity capital markets at First Union Securities in Baltimore, said he doesn't think volume of 1.7 billion shares means "a more robust market going forward."

For much of yesterday's trading session, the Dow was in bear country that it hadn't seen since 1990. At one point, the index plunged 381 points, or 4 percent - a decline of 22.3 percent from its closing high of 11,722 on Jan. 14, 2000.

Chuck Carlson, chief executive officer of Horizon Investment Services in Hammond, Ind., said investors who had previously seen their Nasdaq stocks lose more than half their value seemed to decide they weren't going to watch the same thing happen to their Dow shares.

Other factors contributed to the early sell-off.

The New York-based Conference Board reported yesterday that its index of leading economic indicators fell 0.2 percent, the eighth decline in the past 10 months and a sign that the economy is near a recession, said Alan Skrainka, chief market strategist for Edward Jones in St. Louis.

Some taxpayers may have been selling shares to raise money to pay the taxes on huge capital gains recognized on investments last year, said Tom Schrader, senior vice president in charge of listed trading for Legg Mason Wood Walker in Baltimore.

And many investors are still upset that the Federal Reserve cut a key interest rate earlier this week by only a half-percentage point instead of by three-quarters of a point.

Schrader said a larger cut would have made a substantial difference to the economy and to investors in despair over the hit to their portfolios.

"I know a lot of people who had plans to buy a car or put on an addition or do some landscaping, and they are all putting it on hold," he said. "This type of market is not good for the economy."

But others said reacting to the market would be bad policy for the Fed.

"Whatever the Fed did was not going to be enough to appease people," Brooks said. "If the Fed starts reacting to appease investors, that's a no-win game."

Fed chairman Alan Greenspan can't single-handedly revive the market "unless he cuts a check to buy 100 million computers," said Carlson.

Besides, he said, "This is not a rate problem; it's an earnings problem market."

Recent weak corporate earnings and a rash of companies readjusting their profit outlook downward have shaken investor confidence, he said. He expects earnings problems to continue over the next two or three quarters, with many investors sitting on the sidelines until they are sure that corporate profits won't worsen.

Misera said the market is due for a "relief rally" where in a downturn the market recovers 5 percent or 10 percent and gives investors time to sell off shares and take some gains. He expects that to happen in the next week.

Whatever happens, market experts suggest investors proceed with caution.

"This is not a time to be heroic, to be incredibly bold," Brooks said. He suggests that investors buy stock in nibbles and buy more if the price drops.

With the Dow so close to bear territory, investors should not panic, Skrainka said.

"Last year's favorite game show was `Who Wants to be a Millionaire.' This year, it's `Survivor,'" he said. "The survivalist will tell us what to do when faced with a real bear: Try to stay calm. Do not yell, scream, kick or fight. Don't panic, or make any sudden moves. Stand your ground and never try to outrun a bear; it will only make matters worse.

"It's the perfect metaphor for the market."

Wire services contributed to this article.

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