Dow Climbs but Inches Back to Close Up 39.96 : Drop in Trade Deficit Fails to Sustain a Buying Frenzy
Waffling between euphoria and uncharacteristic restraint, the stock market rose sharply Friday but failed to dazzle following surprisingly rosy news about the trade deficit.
The Dow Jones industrial index gained 39.96 points to close the day at 1,956.07 and finish the week nearly 45 points higher than it began. Broader market measures also rose sharply, and advancing stocks routed declining issues by 1,400 to 300.
Nevertheless, some analysts and traders found the day’s performance sobering--especially when compared to the sizzling showings by bonds and the dollar.
“There was the kind of environment Friday where the market should have really had a shake, rattle and roll day,” said Alfred E. Goldman, a market strategist with the A. G. Edwards & Sons investment firm in St. Louis. “Instead, the market did everything it was going to do in the first 20 minutes and then sputtered.”
An hour before the start of trading in U.S. stocks, the Commerce Department announced that the nation’s trade deficit--instead of widening in November, as many investors had come to fear--actually fell sharply from October. Because the surprisingly low $13.2-billion deficit reflected a significant surge in exports and portended an optimistic economic outlook, bonds and the dollar responded with powerful rallies.
This buying furor seemed certain to extend to stocks--especially since the stock market had been in the doldrums all week as investors fretted over the impending trade data.
But after surging 55 points in the first 30 minutes, the closely watched Dow stalled--hovering near that level all day and then giving up about 10 points in the final half an hour.
Another piece of good economic news--a slight drop in producer prices--did trigger a brief mini-rally during the day. But that inflation index, too, failed to send stocks soaring the way they might have before the October crash.
“Memories of October and fears of program trading are still in investors’ minds,” observed Hugh Johnson, chief investment officer for First Albany. “And while the early surge shows that this market is receptive to good news, I think Friday’s performance should send out a signal that investors are going to need constant nourishment--a lot of good economic numbers--before they’re going to get up the courage to really come back into this market.”
Some institutional investors did venture back into the market Friday after having been sidelined all week--an absence analysts generally blamed on worries over the trade deficit data and program trading. As a result, analysts said, trading volume finally surged from its lackluster levels earlier in the week. On the New York Stock Exchange, 197.94 million shares traded hands, compared to 140.57 million on Thursday.
But because of the rosy trade data, some traders and analysts had expected a 250-million-share day. And they had hoped that the trading would have been spread more evenly throughout the day. As it was, the volume surged at the opening bell and then fell off dramatically after the first hour of trading.
Volume Disappoints
“Considering there was so much pent-up buying demand out there, the best you can say about the volume is that it was good but not spectacular,” said Thom R. Brown, chief of the investment policy committee at the investment firm Butcher & Singer in Philadelphia.
Some traders also contended that both the market’s volume and its volatility were reduced by the Big Board’s temporary curbs on the use of program trading--the computer-directed strategies that involve the rapid trading of blocks of stocks and stock index futures.
The Big Board asked member firms Thursday to refrain temporarily from using the exchange’s high-speed computer trade execution system whenever the Dow swings more than 75 points from the previous day’s close.
Traders noticed that several times during Friday’s session, the prices of key stock index futures fell sharply lower than the prices of the stocks comprising the index. Ordinarily, such spreads prompt program traders to buy the futures and sell the underlying stocks.
But on Friday, “it didn’t look like there was much program trading at all after the initial rally,” said Jack Barbanel, head of futures trading at Gruntal & Co. in New York. “I think a lot of people are pulling back for the duration.”
Some observers speculated that program traders may lie low for several weeks--or until the controversy stirred by the Brady Commission report on the October stock market crash dies down. The report criticized program trading.
The effects of the Big Board curb could have been even more evident Friday had the gains in the Dow moved closer to the 75-point limit. Had that happened, analysts said, some investors might have accelerated their trading to unwind their stock positions. And by doing so, they would have hastened the swing in stock prices.
Because of that expected effect, some critics have charged that limits on program trading would actually increase the volatility of the markets.
“The real acid test of (the restrictions) will come if the Dow swings close to that 75-point mark,” said Eugene J. Peroni, a market analyst with the investment firm Janney Montgomery Scott in Philadelphia. “Until then, they will probably add a little more calm and orderly behavior to the market.”
Among actively traded blue chip issues, Ford gained 2 1/8 to 41 1/2; General Electric, 1 3/4 to 46; Eastman Kodak, 1 3/4 to 51 1/2; International Business Machines, 3 1/8 to 119, and American Telephone & Telegraph, 1 to 29 1/8.
Savings and loan stocks scored some sharp gains in response to a drop in interest rates. Golden West Financial added 2 1/8 to 27, and Great Western Financial rose 1 to 14 7/8.
The NYSE composite index gained 3.19 to 141.16.
The NASDAQ composite index for the over-the-counter market rose 5.91 to 340.14. At the American Stock Exchange, the market value index closed at 268.31, up 4.43.
Staff writer Paul Richter contributed to this story.
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