Stock prices plummet, then rally in heavy trade

Gyrations leave investors perplexed, future cloudy

July 16, 2002|By William Patalon III | William Patalon III,SUN STAFF

The Dow Jones industrial average plunged nearly 440 points by the middle of the afternoon yesterday before a powerful rally left the country's most recognizable stock market measure with a slight loss and investors wondering whether the worst was over - or still to come.

"This was a very wild ride," said Morry Zolet, a senior vice president of investments for Salomon Smith Barney in Lutherville. "But if you are going to be in the market, and you are going to be a long-term investor as you should be, you have to keep your helmet on, keep your roller blades on and ignore all that volatility."

President Bush, speaking to business leaders at the University of Alabama at Birmingham, said the U.S. economy remains fundamentally strong and will recover.

"America must get rid of the hangover that we now have as a result of the binge, the economic binge, we just went through" in the late 1990s, he said. The market was down about 290 points as he spoke, and it fell as much as 439 before rallying to finish the session down 45.34 points, or 0.52 percent.

The Dow closed at 8,639.19, but only because of the powerful rally in the final 90 minutes of trading. Before that, the decline had taken the 30-stock Dow index down within 9 points of its lowest point just after the Sept. 11 terrorist attacks.

The Dow's swing was the biggest recovery in a day since Sept. 1, 1998, and its sixth-largest in at least two decades, according to Ned Davis Research in Venice, Fla.

The Standard & Poor's 500 index, a broader measure of the stock market, fell 3.47 points, or 0.38 percent, to close at 917.92. The S&P was down as low as 876.46 yesterday, its first drop below 900 since Oct. 28, 1997.

Erasing a loss of as much as 4.2 percent, the technology-heavy Nasdaq composite index rose 8.6 points, or 0.6 percent, to finish trading at 1,382.11.

Volume was extraordinarily heavy: About 1.9 billion shares traded hands on the New York Stock Exchange, its 10th-busiest day ever, according to preliminary statistics. Trading was more than 40 percent above its six-month average. More than five shares declined for every two that rose on the New York Stock Exchange.

While the huge market gyrations made for some interesting trading during the day, experts said there were no clear signals sent about the future direction of the stock market or economy.

Investors can interpret yesterday's wild swings "any way [they] want to," said John R. Boo, head of Nasdaq trading at Ferris Baker Watts Inc. in Baltimore.

The rally could mark the beginning of a market recovery, Boo said. After all, there was plenty of power behind it, meaning money that had been sitting on the sidelines in bonds or in cash was being brought to bear by investors with renewed confidence, he said.

Or it could be a "bear-market rally" - which lures investors back into the market, only to separate them from their money when the decline resumes, other experts said.

The lack of agreement stems from the fact that none of the recent market action is a perfect match for classic trading patterns that signal the end of a bear market, experts said.

Investors, beleaguered after two years of historically unparalleled selling, have been watching for signs of complete capitulation, a massive sell-off that means investors have effectively given up on stocks.

That happened in 1997, after which stocks turned and headed north into a powerful bull market that ran until early 2000.

According to some professional investors, the late-day rally negated any chance of yesterday representing the capitulation and bear market's end.

Robert Mewshaw, president of Van Sant and Mewshaw, a Lutherville money management firm, said he expects selling to resume soon. Stock valuations remain much too high, he said, because the late 1990s rally accelerated from bull market to market bubble, a period of irrational buying that sends stock valuations up so high that it takes years to reverse.

"The gist of it is, I think we are going to see [more] painful selling," he said. "This cleansing period is really important and is going to take some time."

Some investors said the capitulation in this market actually took place over a longer period than a single trading session. Last week, for instance, the S&P declined 6.8 percent and the Dow 7.8 percent.

With the economy in recovery, and some decent second-quarter earnings reports expected over the next several weeks, a rebound might be in order, said James Hardesty, president of Hardesty Capital Management in Baltimore.

"The stage is set for a nice rally," Hardesty said.

Trading today should provide some clues. If strong buying ensues, the bear market might have ended. But if yesterday's big burst of late-day buying was caused only by short-sellers covering bets that shares would fall, it's very possible the decline could continue, some experts said.

There is also concern that Federal Reserve Chairman Alan Greenspan might suggest in congressional testimony today that the economic rebound is slowing, deterring buyers.

"Greenspan is the most important thing this week," said Michael Obuchowski, who helps manage $2 billion at Ashland Management Inc. "If Greenspan says anything negative about the economy, there is going to be a huge negative reaction."

Said Hugh Johnson, chief investment officer at First Albany Corp.: "This is an emotion-driven market. [Investors are] trying desperately to protect their nest eggs. [Short-sellers are] ganging up on individual stocks. You have margin calls. ... The dynamic of the market is driving stocks lower and creating more fear. It is a vicious cycle."

Sun staff writer Bill Atkinson, Bloomberg News and the Associated Press contributed to this article.

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