Stocks Drop Broadly as Trading Heats Up
Stocks skidded to a broad loss Tuesday in the heaviest trading in nearly five weeks.
Much of the decline came in the afternoon and reflected futures-related trading by several brokerage houses, analysts said. Last-minute buying lifted prices above their worst levels, however.
The Dow Jones average of 30 industrials dropped 5.82 to 1,333.45, erasing its 3.58-point gain Monday.
Losers overall swamped gainers by more than two to one on the New York Stock Exchange, whose composite index fell 0.80 to 108.32.
Big Board volume swelled to 104.73 million shares from 89.85 million Monday. It was the first time since Aug. 8 that activity exceeded 100 million shares.
The index-related trading, known as “program trading,” is part of complex strategies that brokerage firms use to profit on the difference in price between various stock indexes and futures contracts on those indexes.
The programs have been used increasingly over the past few months and have added unpredictable volatility to the market, especially when trading is otherwise quiet.
Such was the case Monday, when the brokers bought the futures contracts and sold many of the stocks comprising the indexes in order to take advantage of their price spread.
Before the programs hit the market, stock prices had been holding at slightly lower levels amid investors’ continued uncertainty about the economy’s outlook.
In the absence of economic developments, takeover-related and other special-situation stocks continued to dominate Wall Street’s attention.
Richardson-Vicks climbed 1 7/8 to 48 after surging 6 1/8 on Monday, when it rejected an acquisition offer from Unilever NV of the Netherlands.
General Foods, a component of the Dow Jones industrial average, jumped 2 1/2 to 90 after soaring 7 1/8 on Monday, when rumors resurfaced that Philip Morris was interested in buying it. Philip Morris rose 3/8 to 79 3/4.
Pan American World Airways, frequently rumored to be a takeover target, gained 3/8 to 8 after a 1-million-share block crossed at 8 1/8.
Paradyne rose 1 1/8 to 9 3/8 and was the NYSE’s biggest percentage gainer. On Monday, the computer maker settled a suit brought by the government that charged Paradyne with fraud in winning a federal contract. Paradyne agreed to the settlement without admitting or denying any wrongdoing.
On the downside, active losers included International Business Machines, off 1 1/2 to 127 7/8; McDonald’s, down 1 to 66, and Martin Marietta, off 2 3/4 to 35.
American Standard was unchanged at 28 3/4; an 865,000-share block traded at 28 7/8.
Large blocks of 10,000 or more shares traded on the NYSE totaled 2,055, compared to 1,711 on Monday.
Among other indicators, Standard & Poor’s index of 400 industrials fell 1.32 to 208.16, and S&P;'s 500-stock composite index was off 1.35 at 186.90.
The Wilshire index of 5,000 equities closed at 1,933.239, down 13.834.
At the American Stock Exchange, the market-value index tumbled 2.10 to 230.31.
NASDAQ’s composite index for the over-the-counter market closed at 294.50, down 1.56.
In the bond market, prices edged higher in trading.
In the secondary market for Treasury bonds, prices of short-term governments rose 2/32 point, intermediate maturities rose 1/32 point and long-term issues were up 1/32 point, according to the investment firm of Salomon Bros. The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.
The Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, rose 0.03 to 105.24. The Shearson Lehman daily Treasury bond index, which makes a similar measurement, rose 0.14 to 1,105.07.
In corporate trading, industrials rose 1/8 point and utilities were unchanged in light trading.
Among tax-exempt municipal bonds, general obligations were unchanged and revenue bonds were down point. Trading was moderate.
Yields on three-month Treasury bills were down 3 basis points to 7.22%. Six-month bills fell 2 basis points to 7.40%, while one-year bills were unchanged at 7.60%. A basis point is one-hundredth of a percentage point.
Yields on 30-year Treasury bonds were unchanged from Monday.
The federal funds rate, the interest on overnight loans between banks, traded at 7.675%, down from 7.875% late Monday.