Dow Jones bulls its way to big gain

Rise of nearly 490 points is second-largest ever

S&P, Nasdaq climb, too

Rebound or suckers' rally?

Analysts say they await more evidence before declaring death of bear

July 25, 2002|By William Patalon III and Eileen Ambrose | William Patalon III and Eileen Ambrose,SUN STAFF

The Dow Jones industrial average soared nearly 490 points yesterday - its second-largest point gain ever - although experts want more evidence before proclaiming that the bear is dead.

"I'm not certain this is the beginning of a new bull market," said Daniel T. McHugh, president of Lombard Securities in Baltimore.

But, he added, "You don't want to be in a situation where someone drives a bulldozer into your living room and you're [still] asking if someone's at the door."

The Dow soared 488.95 points, or 6.35 percent, to 8,191.29. The Standard & Poor's 500 index jumped 45.73 points, or 5.73 percent, to close at 843.43.

Both the Dow and the S&P enjoyed their biggest percentage gains since the October 1987 stock market crash, while the Dow's point gain was about 10 points below its all-time climb of 499.19, set March 16, 2000.

The Nasdaq composite climbed 61.18 points, or 4.98 percent, to finish trading at 1,290.23.

Trading volume on the New York Stock Exchange was a record 2.74 billion shares, breaking the previous high of 2.67 billion shares set Friday.

Despite the muscular advance, professional investors were uncertain if this was the start of a new bull-market run or merely one of the "suckers' rallies" so prevalent in vicious bear markets.

Those rallies lure investors in, only to thrash them when the sell-off resumes.

On Tuesday, the S&P had closed below 800 for the first time in more than five years, putting the widely followed benchmark on a pace for its worst year since the Great Depression. At its Tuesday close, the S&P was down 31 percent for the year, the largest one-year drop since the 39 percent decline of 1937.

Worse still, the index was down 46 percent from its March 2000 record peak and was approaching the record bear-market drop of 48 percent set during the downturn of 1973-1974.

However, stocks appear to be looking for a so-called "market bottom," experts have said.

"We're trying to flesh out a bottom someplace," said Duncan W. Richardson, chief equity investment officer for Eaton Vance Corp in Boston. It isn't "clear this is the exact bottom, [though] we're getting all the things you want to see in a bottom."

Those factors include fiscal and monetary policies to stimulate the economy, and a forecasted improvement in corporate earnings in key sectors.

Also, stocks have been pummeled anew in the first three weeks of July, possibly positioning them for a rebound, experts say.

Favorable factors

Among the factors favoring a rally, industry experts said, are:

Bearish investment advisers outnumbered bullish ones for the second straight week.

Short interest - the number of shares borrowed and sold by investors who are betting stocks will fall - reached a record 7.55 billion shares on the New York Stock Exchange on July 15, the most recent figures available, according to the Big Board.

That's up 5 percent from the week before. Short sellers borrow shares from other investors and sell them, betting the shares will fall so that they can replace them at a lower price, pocketing the difference.

While "shorting" stocks can be profitable, the risks are higher than in just buying shares because the losses are potentially unlimited.

For that reason, when a lot of speculators are "short" the market, and there's a rally that looks to have legs, the shorts scramble to cover their bets by buying back the needed shares. Such "short squeezes" generate explosive, vertical stock-price ascents that often peter out within a day or two.

`Pent-up demand'

While short-covering was clearly a factor in yesterday's market spike, so was "pent-up demand" from investors looking for bargains, said Angel Mata, senior vice president in charge of listed trading for Legg Mason Inc. in Baltimore.

"Investors finally said, `Enough is enough,'" and bought stocks, Mata said.

The rally was across the board, Mata said, although financial stocks were particularly strong. Financial stocks took a beating this week when major banks were accused of helping Enron Corp. disguise billions of dollars in debt.

But that only prolonged a decline touched off several weeks ago when WorldCom Inc. disclosed accounting irregularities that led to its bankruptcy filing.

A boost to investor confidence helped drive yesterday's market surge. The day began with stocks adding to a huge two-week retreat. But shares shifted course and headed higher after Congress agreed on legislation to crack down on corporate fraud.

That, along with the arrest of Adelphia Communications Corp.'s founder, two sons and two other former executives on charges of securities fraud, helped shore up investor confidence.

J.P. Morgan Chase & Co., accused by congressmen of helping Enron hide debt, said its finances were sound. Citigroup Inc. and J.P. Morgan, the two largest U.S. banks, led yesterday's market advance.

"In the light of day, people are beginning to wonder if these charges [by Congress] have legs," said David DeRosa, president of DeRosa Research and Trading, a consulting and research firm in Connecticut.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.