Program Trading Holds Back Dow : 30-Point Advance Trimmed in Last Hour to Gain of 1.99

The stock market managed to salvage a narrow gain on Thursday after a late-day barrage of program trading crushed a 30-point rise, dashing hopes that the Dow would move solidly above the 2,000 level.

The Dow Jones industrial average squeaked out a 1.99-point gain to close at 1,987.40, although in the broader market losers outweighed gains by a slim margin.

Declining issues outnumbered advances by about 7 to 6 on the New York Stock Exchange, while volume rose to 168.44 million shares, against Wednesday’s 147.59 million.

After shooting well above the 2,000 level soon after trading began, the Dow remained strong for most of the day, buoyed by favorable corporate earnings reports and fresh buying after three days of lower prices.

But a spurt of program trading in the last hour dragged the Dow as much as 12 points lower before the market reversed course again to end about where it started.

“At first we had earnings to back up the gain,” said Prudential-Bache market watcher Larry Wachtel. But “when the market floundered, futures went to a discount and programs kicked in,” he said.

Holding Pattern

Program trading, which has been widely blamed for an upsurge in stock market volatility, allows traders to take advantage of price differentials between the price of stock index futures and the price of the underlying stocks. If the price of futures falls well below the price of the underlying stocks, as it did Thursday afternoon, program traders sell baskets of the underlying stocks and simultaneously buy the stock futures to lock in an automatic profit.

“Day by day, the programs dominate the market more. All else went on hold today,” Wachtel said.

Many stock market analysts say the boom in program trading has driven smaller, retail investors out of the market.

“Action like yesterday and today, where the market gives up a 30-point gain near the close, is really traumatizing a lot of investors,” said Michael Metz, an investment strategist with Oppenheimer & Co.

Metz said conviction about the market’s future direction is now so low among most investors that he does not expect many to re-enter the market until the next trade deficit figure is reported or until the impact of program trading diminishes. “Investors don’t feel that stocks are compellingly cheap,” he said. “The (upcoming) trade figures are pivotal and until we get them, we won’t see any action.”

While stocks veered wildly Thursday, action in the bond and currency markets was slight, and consequently provided the stock market with little direction.

“There have been no new external facts and the dollar and bonds weren’t a factor either way,” said Metz.

But despite the relative calm in the bond market, the 30-year bond is still yielding 9.04%, and has kept inflation fears at the forefront of the market.

Texas Instruments Down

Boston Co. economist Allen Sinai said inflation was growing more rapidly than had been expected because energy and food prices were no longer declining. “The combination of inflation, a soft dollar and higher interest rates suggests a potential intensification of the U.S. bear market,” he said.

General Motors Corp., one of the 30 Dow stocks, helped lift the market early Thursday after a Wall Street analyst raised his 1988 earnings’ forecast for the nation’s largest auto maker. Although GM’s stock rose 1 7/8 to 74 1/8 at one point, it later closed off 1/8 at 72 1/8.

Texas Instruments fell 2 3/4 to 46 1/2 in active trading. Analysts cited disappointment over some aspects of the company’s financial results for the first quarter.

Among other prominent computer and technology issues, Digital Equipment dropped 1 3/8 to 99 5/8, and International Business Machines lost 1/2 to 112 3/8.

By contrast, Tandy climbed 2 5/8 to 45 3/4. The company introduced its version of a line of IBM personal computers.

A few issues did benefit from positive earnings reports. For example, Clark Equipment, which posted a profit in the first quarter against a loss in the like period a year ago, jumped 2 1/2 to 30 3/8.

Schlumberger added 1/2 to 36 1/2 with a boost from sharply higher quarterly earnings.

Gillette gained 1 1/2 to 41 3/4 as traders awaited the outcome of a proxy fight between the company and Coniston Partners for four seats on the Gillette board of directors.

McDonald’s Corp., was unchanged at 41 1/2 although it reported lower first-quarter profits.

Cigarette maker Philip Morris Cos., fell to 86 after rising as high as 88 7/8 earlier in the day. A federal district judge in New York granted Philip Morris, Liggett Group and Lorillard Inc. a favorable ruling in a tobacco liability case.

RJR Nabisco Inc., which includes Reynolds Tobacco Co., rose 5/8 to 50 3/4 in sympathy with other tobacco companies and on higher first-quarter profits.

Staley Continental, a star of the takeover circuit this year, rose 7/8 to 37. The company, which rejected a $1.3-billion tender offer by Tate and Lyle, said it talked with third parties on the sale of Staley or one of its major business segments.

The NYSE’s composite index edged up 0.10 to 145.23. Standard & Poor’s index of 400 industrials rose 0.33 to 298.66; S&P;’s 500-stock composite index was up 0.29 at 256.42.

The NASDAQ composite index for the over-the-counter market dropped 1.04 to 373.20. At the American Stock Exchange, the market-value index closed at 296.71, down 1.01.

The Wilshire index of 5,000 equities closed at 2,563.012, up 1.741. Nationwide turnover in NYSE-listed issues, including trades in those stocks on regional exchanges and in the over-the-counter market, totaled 194.56 million shares.

In foreign trading, London stocks edged higher, buoyed by the sharp gains on Wall Street even though brokers said they were concerned that new money supply figures might signal a rise in Britain’s inflation rate. The Financial Times 100-stock index closed up 5.1 at 1,791.9.

The Nikkei 225-share stock average closed at 26,828.16 points, down 35.93 points, on the Tokyo Stock Exchange.