The Wall Street Rebound : Wide Rally Sends Dow Up Record 186 Points : Broad-Based Gains Help Defuse Panice
Defusing the atmosphere of panic that has afflicted investors for days, the stock market on Wednesday staged a broad, powerful rally that featured the second record one-day point gain in a row for the Dow Jones industrial average.
After rising Wednesday by 186.84 points to close at 2,027.85, the Dow average has in the last two days recouped nearly three-fifths of Monday’s epochal 508-point collapse. The widely followed market indicator had rallied Tuesday by 102.27 points.
In contrast to Tuesday, when the vast bulk of stocks continued their steep slide despite rallies among blue-chip shares, Wednesday’s gains spread to the American Stock Exchange and the over-the-counter market. On the New York Stock Exchange, advancing stocks outstripped declining ones by a ratio of 8 to 1.
The market’s action created some sense that the worst is over. “I think we’ve made a very significant low,” said Michael Metz, market strategist for the investment firm of Oppenheimer & Co.
Yet many among Wall Street’s legion of exhausted professionals did not view Wednesday’s move as a sign that the market’s wounds are healed. Instead, they regard the rebound as a possibly short-lived bounce back from the market’s catastrophically lower levels.
“This is a pretty tentative market,” said Eugene D. Peroni, a market strategist for the Philadelphia investment firm of Janney Montgomery Scott. “Many people still feel there’s something quite ominous out there.”
Precedent for Strong Rally
Others expressed concern that the shock of Monday’s debacle among investors could long outlive any intervening rallies. “Nobody knows for sure what’s going on because nobody’s seen anything like this before,” said Joseph D. Feshbach, technical analyst for the firm of Prudential-Bache Securities. “You still have to see whether you really did lose the current generation of investors.”
Moreover, history shows that strong rallies often follow decisive stock crashes: On Oct. 30, 1929, just after the stock market’s two worst days prior to Monday, the Dow industrials registered a 12.34% gain, still its third-largest ever. Wednesday’s 10.1% rally is the Dow’s fifth largest one-day percentage gain.
Besides the Dow industrials, the Standard & Poor’s index of 500 institutionally held stocks had a second daily record gain of 21.55 points to close at 258.39, and the NYSE Composite index had its second consecutive record, rising 11.98 to close at 145.02. The Amex index reversed Tuesday’s loss with a 23.81-point gain, and the NASDAQ over-the-counter index followed suit with a 24.07-point rally.
Stock prices in Tokyo and London also showed sharp gains in Wednesday’s trading, with the Nikkei average of 225 Tokyo stocks turning in a record gain of 2,037.32 points to close at 23,947.40, up 9.3%. Share prices, heartened by the rebound on Wall Street, were up again today in early trading on the Tokyo Stock Exchange. The Nikkei average rose 729.96 points, or 3%, to close the morning session at 24,677.36.
In Hong Kong, where the stock exchange was shut down for the week after a record drop on Monday, officials said the market might reopen today or Friday.
Trading volume on the New York Stock Exchange finally dipped below its 600-million-plus share pace of Monday and Tuesday, with 449.35 million shares changing hands in the exchange’s third-busiest day ever.
Not ‘Out of Control’
“You could only consider this market calm or orderly in comparison to yesterday or Monday,” said Gene D. Donney, chief executive of Elders Futures, a New York-based securities unit of a big Australian brewery company. “It’s merely wild, instead of out of control.”
Traders and others said the pace of mutual fund withdrawals by frightened individual investors appeared to have abated Wednesday, reducing selling pressure by the funds. There were conflicting reports about the pace of margin calls, in which investors who have purchased stock with borrowed money are ordered by their lenders to put up more cash or sell their shares. Some brokerages reported that margin calls were running ahead of Tuesday’s record pace, while others said they had slowed.
For the third day, the stock market appeared to be virtually free of “program trading,” the sophisticated, high-volume orders blamed for helping to set off the market debacle this month.
Program traders--mostly employed by large institutional investors--use computers to dictate the timing of immense buy and sell orders shifting billions of dollars between the stock market and related stock-index futures markets. These orders can overwhelm the trading capacity of the New York Stock Exchange floor, creating appallingly large and abrupt moves in such familiar market indexes as the Dow average and the Standard & Poor’s 500 stock index.
Program Trades Restricted
On Tuesday and Wednesday, the NYSE asked that program trades be suspended from its automated order-taking systems, severely crimping their trading abilities. Many program traders said Wednesday that their inability to get reliable stock quotes from the NYSE floor--especially on Tuesday, when as many as 60 key stocks at a time were suspended from trading because of an excess of sell orders and a shortage of buyers--effectively kept them out of the market anyway.
Others said the NYSE’s move was an indispensable step toward restoring order to the markets. “It was a brilliant idea to throw a roadblock in the way of program trading,” said Metz of Oppenheimer & Co.
There have been scattered reports of ruptures in the procedures for completing trades on the exchange floor during this week’s frenzied trading, but no serious failures were reported. “I don’t think anyone would deny there have been minor glitches along the way,” said Sharon Gamsin, a spokesman for the NYSE. “But other than that it’s been a tremendous performance considering what’s been going on.”
Monetary Liquidity
The rebound in stock prices came as the central banks of Japan, Germany and the United States moved to inject monetary liquidity into the markets to help support stocks. The most aggressive steps to loosen monetary reins appeared to have been taken by the Federal Reserve Board. The Fed’s activity was reflected in a drop in the federal funds rate, the level at which banks lend to each other, to 6.5% from 6.75%.
Also supporting the stock market were programs announced by more than 80 U.S. corporations to repurchase blocks of their own stock on the rationale that the crash had reduced their shares to levels far below their real value. The programs have the effect of propping up prices of those stocks. Among top corporations announcing share buy-backs were Lockheed, Minnesota Mining & Manufacturing (3M) and E. F. Hutton.
Hutton’s plan to repurchase 10% of its stock, or 3.4 million shares, had the added motivation of defusing persistent rumors--strenuously denied by its executives--that the market crash has crippled it financially. By allocating the more than $57 million the program would cost at current prices, the firm is trying to indicate that it has a generous hoard of spare cash on hand, analysts said.
Meanwhile, there were growing signs Wednesday that this week’s debacle may provoke permanent and fundamental changes in the way stocks and other investment instruments are traded.
Wednesday brought the first indication that the furious trading had staggered the financial underpinning of the New York Stock Exchange, as Merrill Lynch & Co. said it had agreed to acquire the exchange specialist firm of A. B. Tompane & Co.--breaching for the first time a NYSE tradition that barred major securities firms from taking on the specialists’ privileged trading rights. Under NYSE rules, specialist firms function as auctioneers supervising trading in specific stocks. They are also required to maintain orderly markets in their stocks by buying when all others are selling.
Millions of Dollars Lost
In routine markets, these responsibilities generate enormous profits. But in the face of Monday’s relentless down market, the floor’s specialist community reportedly lost millions of dollars.
Although Merrill Lynch said it had been negotiating “off and on” to acquire Tompane for some 18 months, sources said the NYSE had asked the giant firm to accelerate its takeover after losses in Monday’s trading had handicapped the Tompane firm. Tompane supervises trading in 28 securities, including the stock of USX, Royal Dutch Shell and Chemical Bank.
In some respects the takeover is an acknowledgement that today’s multibillion-dollar trading has far outstripped the financial capability of typical specialist firms, most of them family operations.
In other action, the NYSE said it had suspended three small securities houses because of crash-related financial woes. None of the three did significant business with the public, the Big Board said.
The market’s recent activity is reviving the debate over the impact of computerized trading on stock prices. Rep. Edward J. Markey (D-Mass.), chairman of the House subcommittee on telecommunications and finance, said he would investigate the causes of Monday’s market crash with a focus on whether “the benefits of program trading outweigh the enormous potential for disaster which was evident last Monday.”
Futures and Options
Among current proposals to restrict activity in stock-index futures and options, the keys to program trades, is the imposition of limits on any investors’ futures and options holdings, or increasing minimum down payments for futures contracts to make them more expensive to trade.
Yet institutional traders say the vast holdings of such institutional investors as pension funds and insurance companies make technologically advanced trading techniques--in which whole portfolios, rather than individual stocks, are traded in a flash--inevitable.
“Portfolio trading is really scaring the hell out of the individual traders,” acknowledged Eric Seff, a principal of the program-trading firm of Chase Investment Management Corp. “But when you had a situation in 1900 in which the new automobile scared the horses, would you have made progress by banning the auto? The danger is in trying to make problems disappear by outlawing them.”
