Investors heaved a collective sigh of relief Monday as the feared replay of October's stock market cataclysm failed to materialize.
After a tentative start, the Dow Jones industrial average hovered near Friday's closing level most of the day before sprinting ahead in the final hour of trading to finish at 1,945.13. With the late-afternoon rally in blue-chip stocks, the closely watched index recovered 33.82 of the 140 points that it lost in Friday's rout--the third-largest loss ever.
Many on Wall Street had feared the worst after market analysts began drawing parallels between Friday's stock-price free fall and the 108-point Dow plunge on Friday, Oct. 16, which preceded the 508-point collapse on Black Monday, Oct. 19. So having braced themselves for another volatile day, they were greatly cheered by the market's surprising resiliency Monday.
"This was supposed to be the end of the world as Wall Street knows it; instead, it was a non-event," said Thomas Ryan, who heads equity trading at Kidder, Peabody & Co.
Nevertheless, many traders and analysts remained on tenterhooks. Their fears: The broader market did not mirror the blue chips' strength, trading volume was suspiciously light and the controversial computerized trading schemes known collectively as program trading were controlling the day's action.
"It was all program trading today," said Philip C. Puccio, manager of institutional trading at the New York investment firm of Dillon, Read & Co. "The institutional investors all backed away after the first confused hour, and that's not a healthy sign."
As evidence, Puccio pointed to the day's most actively traded New York Stock Exchange stocks. All are components of the Standard & Poor's 500-stock index that is the most popular program trading tool.
"Programs are making these markets schizoid, and I guess it's going to take regulation of some sort to stop them," said John Burnett, a senior trader at the brokerage of Donaldson, Lufkin & Jenrette. "Anyone who's not scared of these programs and this market is living on a different planet."
The huge computerized trades were blamed for Monday's light, confused trading just as they were for Friday's late-afternoon nose dive.
At the opening bell, the value of the futures contract tied to the Standard & Poor's 500 index opened at substantial premiums to the value of the actual stocks in the index. To lock in an immediate profit, traders who capitalize on such gaps sold the futures and bought the stocks.
Other investors piggy-backed on these arbitrageurs' trades, and stock prices soared. Within the first 15 minutes of trading, the Dow average rose 28.85 points.
But in a matter of minutes, the tables had turned. The actual stocks in the index began trading at higher levels than the futures contracts. So the program traders bought futures and sold the index's underlying stocks, sending stock prices into a tailspin and whipsawed institutional investors to the sidelines.
Before the first hour of trading had ended, the Dow had suffered a 50-point reversal.
"The gyrations were all over the lot," Burnett said. "It was absolutely ludicrous."
To add to the early confusion, the Big Board specialists who function as the market's traffic cops "were very nervous in the early morning and seemed very reluctant to step in," observed Eugene Peroni, a market strategist for the Philadelphia investment firm of Janney Montgomery Scott.
The result: "With no one to stabilize these markets, they were extremely volatile," Peroni said.
Not until the futures markets stabilized did traders begin to see some brave institutional investors test the waters. Gradually, the gyrations stopped.
For 4 1/2 hours, the Dow bounced around in a narrow range only slightly higher than Friday's close, and trading slowed to a crawl.
On a day when some were expecting an avalanche of trades reminiscent of Black Monday's overwhelming 604.33 million shares, only 158.98 million shares changed hands Monday on the Big Board. Even last Friday, a slow trading day by Wall Street's post-crash standards because of the snowstorm that rocked the Northeast, 197.30 million shares changed hands.
Only in the last hour of Monday's session did the volume pick up slightly--again, due to program trading.
"A couple of buy programs kick in, and suddenly we're up 30 points," Burnett said. "If that doesn't sound very healthy, that's because it's not."
Spurred by the 11th-hour rally, blue chips prospered. International Business Machines rose $2.875 a share to close at $117.75, Eastman Kodak gained $2.25 to close at $49.75 and Minnesota Mining & Manufacturing advanced $3.50 to close at $62.875, to name a few.
More Declining Issues
The broader market was less fortunate, as declining issues outnumbered advancing issues. The NYSE composite index added only 1.78 points to close at 138.81, the S&P; 500 index rose 4.09 to close at 247.49 and the American Stock Exchange index fell 0.48 points to close at 265.96.
Analysts said investors seemed numb after Friday's sudden sell-off, which was blamed on everything from fears that interest rates would rise to the weather to the Brady Commission report on October's market crash to Big Board specialists' fears about holding stock over the weekend.
"They just couldn't be assuaged," Puccio said--not by the pundits' weekend assurances that Black Monday would not be repeated nor by the better-than-expected performances by overseas stock markets nor by comments by President Reagan that seemed to dismiss the trade deficit as a serious problem.
Trying to bolster public confidence in the U.S. economy, the President told a group of Cleveland civic leaders that the United States is working with its trading partners to stabilize the dollar. And praising the U.S. trade deficit as a sign of economic strength, he lambasted his critics' contentions that it is a symbol of economic weakness.
Market analysts widely believe that the trade deficit--which increased to a record $17.63 billion in October--is the next hurdle to be faced by the stock market. Many say the anticipation of November's data--scheduled to be released Friday--was partly responsible for last Friday's market turmoil.
"Even if the dollar numbers (for the trade deficit) come in higher than expected, I think the market can absorb that shock if the unit volume is in line with expectations," Ryan said. "My fear is what will happen if we get the worst of both the unit and dollar numbers."