Dow Plunges 61.87 in Record Market Setback : Sudden Decline Reflects Spreading Consensus That Two-Year Advance May Have Hit Its Peak

The stock market suffered a loss of record magnitude Monday, as the Dow Jones industrial average toppled 61.87 points to 1,839.00 just two sessions after closing at a record high of 1,909.03.

The decline in the key index of blue-chip stocks exceeded the previous one-day record collapse, set only last June 9, by more than 16 points.

The market’s sudden acrophobia reflects a spreading consensus on Wall Street that the record-smashing two-year climb in stock prices may finally have hit its peak after breaching the 1,900 level last week. Since July, 1984, the Dow index of 30 major industrial stocks has risen nearly 75% without a significant pause.

Cashing In Profits

Stocks in industries that had run up big gains in recent weeks, including retailers, drug companies and the tobacco-consumer goods sector, were particularly hard hit Monday. That suggests that many investors were cashing in their fat profits.

The loss was precipitated, traders said, by sharply bearish recommendations issued Monday by two leading market analysts who had been consistently optimistic: John A. Mendelson of the New York investment firm of Dean Witter Reynolds, and Robert Prechter, a Gainesville, Ga., analyst whose computer models have given him an enviable record of predicting market turns.

“I think the market has reached its high for the year,” Mendelson said Monday in an interview. He observed that several technical indicators--that is, statistical trends within the market itself--suggested that a downturn paring 15% to 20% from the Dow industrials was imminent.

Among other figures, he said, cash on hand among institutional traders such as pension funds is “quite modest,” meaning the “big” money needed to bid up stocks is depleted.

In addition, he said, the average trading volume on the New York Stock Exchange, which has peaked an average of 4.7 months before stock prices have peaked in this century’s bull markets, has been on the decline since April. He added that volume in over-the-counter, or non-exchange, trading during June was a record 97% of New York Stock Exchange volume, a hint that the heated activity in speculative stocks that often precedes a market downturn had arrived.

Prechter, whose predictions are based on an abstruse mathematical reading of historical trends, recommended that investors take profits on all trading positions. He compared the market’s fading upward momentum of recent months to a ball thrown into the air. “It’s got to slow down and stop just as it reaches its highest point,” he said Monday.

Traders said also that bearish remarks by three respected market analysts in the latest edition of Barron’s, a Wall Street weekly that arrived on investors’ desks over the weekend, contributed to the market’s abrupt pessimism.

“Somebody had to say these things at the right time,” remarked William LeFevre, chief market analyst for the investment firm of Purcell, Graham & Co. He said economic and industrial indicators, which were languishing, had been calling the stock market’s euphoria into question for several months.

Cut in Interest Rates

With corporate profits continuing to disappoint investors and economic indicators showing sluggish growth, LeFevre said, “the only thing holding the market up was the chance of a cut in interest rates.” Many traders believe, however, that stock prices long ago reflected a percentage-point cut in interest rates that has not yet materialized.

Monday’s abrupt decline came after the Dow index closed above 1,900 points for three straight days last week.

Although the 61-point drop sets a record by a wide margin in one-day declines, however, the fall of 3.3% of its total value is still dwarfed in percentage terms by the collapse of Sept. 28, 1929, when the Dow’s loss of 38.33 points amounted to 12.8% of the index’s total value at that time.

The latest decline was exceptionally broad, spanning every industrial sector. Of the 30 stocks in the Dow industrial index, all fell. International Business Machines, which dominates the index, fell $4 to $145.

Decisive Ratio

On the New York Stock Exchange the number of stocks falling in price outstripped advancing issues by 1,460 to 260, a decisive ratio of almost 6 to 1; 138.23 million shares changed hands.

Among big losers in sectors that had shown lavish gains recently, J. C. Penney fell $4.875 to $79.25, and K mart lost $4 to close at $52.25 in the retailing sector. Philip Morris, the producer of Marlboro cigarettes and owner of General Mills, lost $5.25 to close at $71. And Coca-Cola lost $2.75 to close at $40.875.

Wall Street professionals said the Dow’s loss was exacerbated by the so-called “program trading” of large institutions. These big investors use computerized systems to match their trades in selected groups of stock and in corresponding stock-index futures and option contracts. When the futures sell at a lower price than the stocks, the traders buy the futures and sell the stocks; this process guarantees them a profit roughly equal to the difference in price between the two.

Because many large investors undertake these large-scale trades virtually simultaneously, their effect on the stock market can be immense. Still, many professionals argue that such trades only magnify trends that would be apparent in any event.