Dow Sinks 85 Points but Recovers to Close Off 3.69
Computerized program trading led the stock market on one of its most erratic days Tuesday, with the Dow Jones industrial average falling 85 points before it reversed course, trading briefly above Monday’s close, before ending the day off 3.69 at 2,659.22.
The market’s wild ride was set in motion by the apparent collapse of any hope for a buyout soon of UAL Corp., the parent of United Airlines. This prompted a selloff at the start of the trading day of airline and other potential takeover stocks. In addition, economic news about a fall in durable goods orders in September was widely interpreted as a possible sign of a recession and was cited as a factor in the initial heavy selling of stocks.
But the wide swings in stock prices throughout the day were attributed mainly to program trading, as specialized investors sought to profit from the seesawing differences between the prices of futures contracts for baskets of stocks and the prices of the stocks themselves. Traders said the heavy trading volume--237.96 million on the New York Stock Exchange, compared to 135.86 million Monday--masked the fact that many institutional investors retreated to the sidelines rather than risk trading in the face of unpredictable price swings.
Brad Weeks, senior vice president for equity trading at Donaldson, Lufkin & Jenrette Securities, called the market’s volatility Tuesday “absolutely ridiculous” and said it appeared to be almost entirely related to computerized arbitrage trading between stocks and stock index futures, such as the Standard & Poor’s 500, a futures contract for a basket of 500 stocks, and the major market index, made up of stocks in the Dow Jones industrial average.
Jim Creber, a partner at the brokerage Miller Tabak Hirsch & Co., said, “We’re seeing (program traders) play around with this market and whip it around.”
The sharp drop in futures prices early in the day triggered a temporary trading halt in the S&P; 500 futures contract. The halt is part of the so-called circuit breaker mechanisms implemented since 1987 in an effort to curb wide swings in stock and futures prices, and it goes into effect when the contract falls below a 12-point limit. Some market analysts said the brief halt contributed to the recovery of futures and stock prices later in the day.
News late Monday that UAL’s board had decided to keep the company independent for now, and the apparent evaporation of hope for a new bid soon, led to a massive selloff of the stock by speculators in takeover deals, known as arbitragers. The fate of the UAL deal has had a profound impact on the stock markets since Oct. 13, when the Dow index dropped 190 points in response to news that the group trying to take the company private had failed to obtain financing for its $6.75-billion, $300-a-share offer.
On Tuesday, trading of UAL was delayed because of a sharp imbalance of sell orders over bids to buy. Later, the stock traded down as much as 30 points from its close on Monday. But rumors that one or more brokerages were “sweeping the street” with large buy orders for the stock fueled speculation that a new takeover offer might emerge. This caused the stock to bounce back, closing off only 8 3/8 at 170.
The rebound of stock prices late in the day mainly affected the blue chips. On the New York Stock Exchange, declining stocks outnumbered rising ones by 3 to 1, with 360 up, 1,213 down and 381 unchanged.
In addition to UAL, other active issues included Security Pacific, which fell 7/8 to 44 1/2; Philip Morris, up 5/8 to 44 1/2; Chase Manhattan, down 7/8 at 38 7/8, and AMR, down 1 3/4 at 68 7/8.
Prices of stocks traded over the counter fell, wiping out most of the recovery made late last week. The NASDAQ composite index of OTC stocks fell 5.52 to close at 461.70, only slightly above its recent low on Oct. 17 of 459.93.
Despite the recovery by blue chip stocks late in the day, traders said Tuesday’s economic news was discouraging and could put a damper on the market in coming weeks. The Commerce Department announced that orders for durable goods slipped 0.1% in September. Traders noted in particular that if the volatile defense sector is excluded from the figures, remaining durable goods orders fell 3.9%, the biggest drop in four months. The figures came as several large companies Tuesday reported lower-than-expected third-quarter earnings.
“This is confirmation that the economy is slowing down,” said Anthony Woodruff, managing director in charge of equity trading at Kidder, Peabody & Co.
In Tokyo, stock prices closed lower in brisk trading, with the key 225-share Nikkei index slipping 58.97 to close at 35,526.55 after climbing 99.14 on Monday.
The initial decline in the U.S. stock market Tuesday led to nervousness in London. The Financial Times-Stock Exchange 100-share index closed sharply lower, off 40.4 at 2,1149.3.
THE DOW EVERY 15 MINUTES Chart shows index on the quarter-hour. Its lowest point--2,577.25, an 85-point drop--occurred at 10:36.
Source: Knight-Rider TradeCenter
