Profit Takers Cut Stock Rally Off; Dow Slides 40.97
The stock market’s two-month-long rally was dealt a serious blow Monday after profit taking and a late wave of computer-based program trading pounded blue chips to a sharply lower finish.
The Dow Jones index of 30 industrials fell 40.97 to 2,647.00, for its biggest one-day loss since it dropped 46.47 on June 29.
Declining issues outnumbered advances by about 3 to 1 in nationwide trading of New York Stock Exchange-listed stocks.
Since the beginning of July, the 30-share Dow index had gained more than 11%. Only two weeks ago, stocks closed above the 2,700 level for the first time in two years and appeared poised to break through an all-time closing high of 2,722.42 set Aug. 25, 1987.
But since then, the market’s price gains have been muted, and trading had been confined to a fairly narrow range on low volume.
Traders said a pullback had been expected, noting that blue chips have risen for the past seven weeks.
The inability of blue chips to decisively cross their all-time closing high may have also bothered some investors, analysts said.
“What worries me is that the pattern for market behavior is beginning to closely reflect 1987,” said Jack Barbanel, a senior vice president at Gruntal & Co., noting that blue chips also rose to new highs in August, 1987, two months before the stock market crashed.
However, Barbanel said many other factors are different from two years ago, including a moderate interest rate environment and more reasonable price/earnings ratios among big companies.
Not all observers of Monday’s market decline were discouraged. Ken Ducey, a senior vice president at S. G. Warburg, said the selloff occurred on relatively mild volume.
Stock prices started lower Monday and stayed depressed despite early strength in the bond market.
Interest rates fell in early trading in the credit markets but then reversed course and headed higher as the day progressed.
Among actively traded blue chips, General Electric dropped 1 1/2 to 56 1/2, International Business Machines fell 2 1/8 to 113, Exxon dipped 1/2 to 43 1/4, American Telephone & Telegraph retreated 1 1/4 to 38 1/4 and USX fell 5/8 to 33 5/8.
An exception to the downtrend was Dow Chemical, which gained 1/4 to 100 and traded as high as 101 5/8. The company said it had no news to report that would account for the advance.
Lyphomed jumped 7 3/4 to 30 1/4 as the most active issue in the over-the-counter market. The company said Fujisawa Pharmaceutical, which owns about 30% of its stock, proposed to acquire the rest for $31 a share.
Among individual issues, Squibb added 3/8 to 112 7/8. The company attributed the gain to the higher share price of its merger partner, Bristol-Myers Corp., which rose 3/8 to 48 3/4 and was the most actively traded stock on the NYSE.
Deltona, also traded on the NYSE, climbed 1 3/8 to 5 3/4. The company, which had earlier rejected a takeover proposal from Sycamore Acquisitions Corp., said Sycamore made a new offer valued at about $7.01 a share.
UAL Corp. rose 2 3/4 to 273 3/4 as investors continued to bet that the airline company would be the subject of a bidding war. British Airways and Texas investor Robert M. Bass are said to be interested in acquiring the company. Los Angeles investor Marvin Davis has offered $6.19 billion for UAL.
In Tokyo, stocks rose to a record close as program trading lifted the market despite lackluster sentiment. The key Nikkei 225-share index rose 77.69 to close at 35,140.83 after easing 26.97 Friday. The previous record close of 35,090.11 was set on August 17.
On the London Stock Exchange, share prices fell slightly, as conflicting factors affecting the market canceled each other out. The Financial Times 100-share index closed 0.4 lower at 2,374.7.
Credit
Bond prices also fell in light, erratic trading after an early rally dissolved in the afternoon.
The Treasury’s benchmark 30-year bond was up 11/16 point at one point in the day, but finished the session with a decline of 3/16 point, or $1.88, for every $1,000 in face value.
The bond’s yield rose to 8.17% from 8.15% late Friday.
There was no obvious reason for the market’s downward turn aside from changeable sentiment. Several factors were cited by analysts, including the reported sale of nearly $900 million in mortgage-backed securities by Gibraltar Savings, a Los Angeles-based thrift that is under federal control. Gibraltar did not immediately confirm the sale.
Also weighing on the market was concern about investors’ appetite for more than $26 billion in one-, two- and five-year securities being auctioned by the Treasury this week.
A decision by the Federal Reserve Board to allow Japanese firms to remain as primary dealers in the U.S. government bond market helped prices in early trading, analysts said.
Traders said the light volume tended to exaggerate price movements.
“It was just technical trading today,” said Rich Spurgin, director of fixed-income research at Technical Data Global Markets Group in Boston.
In the secondary market for Treasury bonds, prices of short-term issues were 1/32 to 5/32 point lower, intermediate securities were down 3/16 to 9/32 point and long-term issues were down as much as 5/16 point, according to Telerate Inc., a financial information service.
The movement of a point equals a change of $10 in a $1,000 bond.
The Shearson Lehman Hutton daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, fell 1.75 to 1,175.61.
Corporate bond prices edged higher. Moody’s investment grade corporate bond index, which measures total return on a portfolio of 80 corporate bonds with maturities of five years or longer, was 328.61, up 0.36.
In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds fell 1/8 point. The average yield to maturity rose to 7.33% from 7.32% Friday.
The federal funds rate, the interest on overnight loans between banks, was quoted late in the day at 8.875%, unchanged from Friday.
Currency
The dollar ended mixed against key foreign currencies in thin, lackluster trading.
Gold prices rose slightly. On the Commodity Exchange in New York, gold bullion for current delivery closed 30 cents higher at $368.40 an ounce. Republic National Bank of New York quoted a late bid of $366.35, up 35 cents from Friday.
Currency dealers said that in the absence of any new economic data, the dollar drifted in a narrow trading range dominated mostly by internal market forces.
The dollar had risen sharply last Thursday after the release of a better-than-expected U.S. trade report for July but ended the week lower as dealers cashed in on the rally.
Trading was described as thin Monday, with many dealers out on vacation.
In Tokyo, where trading ends before Europe’s business day begins, the dollar fell 0.17 Japanese yen to close at 143.35 yen. It was quoted at a lower rate of 142.80 yen in London, and at 143.05 yen in New York, up from 142.60 yen Friday.
The dollar fell against the British pound in London and New York. It cost $1.5745 to buy one pound in London, up from $1.5655 late Friday. Sterling fetched $1.5720 in New York, up from $1.5659.
Commodities
Prices of cocoa futures plunged to life-of-contract lows after indications that two major producers would no longer back current price support levels.
On other markets, soybeans weathered early pressure and made a dramatic turnaround on heavy professional buying and copper finished higher.
Cocoa prices slipped as low as $69 before settling $46 to $57 lower on the New York Coffee, Sugar and Cocoa Exchange, with the contract for delivery at $1,108 a metric ton.
Computer-programmed selling greased the slide, but traders found no shortage of bad news Monday.
The world’s leading cocoa producer, Ivory Coast, suggested that the price support level set by the International Cocoa Organization may be nearly 10% too high. Malaysia, the fourth-leading producer and considered by many a crucial player in any ICCO pact, reiterated that it would not join the organization until it sorts out “domestic problems.”
“The market was very demoralized. It’s clear there’s much cocoa already out there, and the 1989-90 crop is in very good shape,” said Arthur Stevenson, who tracks cocoa for Prudential-Bache Securities Inc., New York. “And matters could be further complicated if there is continued disagreement over what price can be defended.”
Grain futures mostly were lower, but soybean prices were sharply higher on the Chicago Board of Trade.
Traders credited heavy professional buying, led by Refco Inc. and Rosenthal-Collins in lots of 2 million bushels each, with sparking the turnaround in soybeans.
Soybean prices drifted downward at the opening after weekend rain brightened prospects for the crop. But after prices held firmer than expected, buyers stepped in and began the upward move.
“People who sold the market on the weekend rains might have been surprised,” said Vic Lespinasse, a trader with Dean Witter Reynolds Inc., Chicago. “But we’re headed back for more traditional August weather and the crops are going to need more than the rain in the forecast today and tomorrow.”
Wheat was 0.25 cent to 3.75 cents lower, with the contract for delivery in September at $3.9025 a bushel; corn was 0.50 cent lower to 0.25 cent higher, with September at $2.3475 a bushel; oats were unchanged to 1 cent higher, with September at $1.3875 a bushel; and soybeans were 4 to 12.25 cents higher, with August at $6.28 a bushel.
