Bearish Sentiment Grips Markets; Dow Skids 57.61 : Last Hour Hit by Surge in Programmed Trading; Analysts Take Cautious Outlook
As if swept into a vortex, the stock market Thursday abandoned a nearly daylong struggle to break even and dropped sharply amid exceptionally heavy activity in the last half an hour of the trading day.
Falling 57.61 to 2,355.09, the Dow Jones industrial average compounded Wednesday’s record point loss of 95.46.
In all, the closely watched index of major blue-chip stocks has now slid 367.33, or 13.5%, from its record close of 2,722.42 on Aug. 25. That marks the Dow’s largest percentage “correction,” or setback, since it lost 15.6% from Nov. 29, 1983, to July 24, 1984.
The Dow index’s drop was echoed by losses in other key market indicators.
Coming on the heels of Wednesday’s demoralizing loss and last week’s unnerving one-day drop of 91.55, Thursday’s dramatic selloff appeared to have frightened many top market analysts into forecasting more than a simple temporary pullback in stock prices.
In part, this was because trading volume on the New York Stock Exchange soared Thursday to 263.18 million shares, up from Wednesday’s 207.35 million and the fourth-heaviest trading day on record; that might indicate that more big investors are joining the selling spree.
“I’m abandoning hope of new highs for the next three to four months,” said Eugene Peroni, market analyst for the Philadelphia investment firm of Janney Montgomery Scott. “This is the most bearish I’ve been in five years. We’ll have to see much more nail biting, if not bloodletting, before the market turns (up) again.”
Thursday’s trading came amid disconcerting news in the credit markets. Chemical Bank announced early in the day that it was raising its prime rate to 9.75% from 9.25%, where most banks had set the rate just last week. Although no major banks followed Chemical’s lead during the day, the hike redoubled the market’s concern about a general rise in interest rates, which drains investment money from the stock market because it makes bonds more attractive.
Even investors who believe that the current downturn is temporary were treading lightly in the face of the market’s negative sentiment. “I think we’re just about at the bottom,” said Courtney D. Smith, a trader at Banque Paribas in New York. “But I’m not betting my money on it.”
Targets Trimmed
Added Tom Bailey, the head of Janus Capital, a Denver mutual fund and money management firm: “We’ve been doing what everyone else is doing (selling). Why fight it?”
Other market technicians--analysts who base their forecasts on the market’s statistical behavior rather than fundamental economic and industrial conditions--were trimming their downside targets to a low of 2,200 on the Dow index, down from what had been a prevailing 2,400-point target.
Still, many market observers detected more than statistical reasons for Thursday’s down draft.
One was an upsurge in so-called program trading, in which institutional investors such as pension funds and insurance companies relying on computer-programmed instructions concentrate heavy trading into extremely short time frames. The program traders generally shift their money between stocks and corresponding stock-index futures in multimillion-dollar waves.
Traders said that a swell of programmed selling swept the exchange floor just after 3:30 p.m. EDT; in the final half hour, some 28 million shares were traded--nearly triple the volume of the previous 30 minutes. In that time, the Dow index dropped more than 50 points.
$2.3-Billion Sale
The programs overwhelmed the market’s wan effort to stay even for the day; for part of the trading session, the Dow index was actually in positive territory.
Futures traders said the late selloff had its genesis in a $2.3-billion sale of stock-index futures by the Maryland Public Retirement System before noon. That depressed futures prices, making the futures an attractive buy for many institutional shareholders. When index-futures dip particularly low relative to corresponding stocks, institutional investors can make money by selling the stocks and buying the future, earning a profit roughly equivalent to the price difference. At the end of the stock trading day, almost every institution with a such a parlay in its computer was selling stocks, traders said.
The market may also have been unnerved by the White House’s efforts during the day to “jawbone” interest rates lower: Treasury Secretary James A. Baker III was quoted as saying that the market’s inflationary fears were “overblown” and “unjustified.”
Wall Street often treats such statements as wishful thinking and as indicating that government officials may take the fears seriously, some analysts said.
Transportations Slide
“Back when Kennedy was President, his father (leading Wall Street figure Joseph P. Kennedy) advised him to never comment on the markets, whatever happens,” said William M. LeFevre, chief market strategist for Advest Inc. “The few times the White House has commented, it’s been ill-advised, because the markets know that political concerns are irrelevant to Wall Street’s.”
Among other developments that may have cowed investors was a sharp drop in the Dow Jones transportation average, which suffered its second-worst point loss in history, falling 31.35 to 980.24. According to the widely followed “Dow Theory” of investing, when moves in the Dow industrials are paralleled by moves in the transportation sector, the market is likely to continue to move in the indicated direction. Until this week, the transportation index has shied away from this so-called confirmation of the bearish move in the industrial average.
