Financial, Drug Issues Lead Stock Rally; Dow Up 88 but Nasdaq Slips
Wall Street staged a mild relief rally Tuesday as beaten-down financial and drug stocks rose, leading the broad market higher.
But selling picked up among technology issues, and some experts predicted that the once-hot sector will come under more pressure in the days ahead despite an upbeat profit report late Tuesday from Microsoft.
The Dow Jones industrial average jumped 88.65 points, or 0.9%, to close at 10,204.93, for its second straight gain. But after soaring 219 points in the morning after the September consumer inflation report figures came in as expected, the blue-chip index faded steadily.
The Nasdaq composite index, meanwhile, ended down 0.97 point at 2,688.18, after initially climbing 40 points.
The day provided fodder for bulls, who predict that the market’s recent downturn is nearing an end, as well as for bears, who say stocks face longer-lasting problems.
Bulls were encouraged by the big gains in bank and drug stocks. Both sectors had struggled since peaking in April, but they have rallied for two straight days thanks to good earnings reports. The American Stock Exchange drug stock index surged 4.5% on Tuesday, and the Philadelphia/KBW bank stock index leaped 3.6%.
Johnson & Johnson climbed $5.25 to $99.75, Pfizer jumped $2.38 to $39.94 and Eli Lilly added $2.81 to $69.88. Among financial issues, Wells Fargo surged $2.13 to $41.63, and Bank of America shot up $3.94 to $53.50.
Those sectors “have completed their corrections” and may be set for a sustained rebound, said Marshall Front, chairman of Front Barnett Associates, a Chicago-based money management firm. For the market overall, “I think the bulk of the selling is behind us. Whatever selling we get [from here] will be modest.”
Tuesday’s tech stock decline, which included sharp drops in bellwethers Dell Computer and Intel, also was viewed positively by many bulls as a sign that the broad market pullback is winding down. Sell-offs in the market’s leading sector are usually among the last steps in a “correction.”
Overall, rising stocks outnumbered falling issues by 8 to 7 on the New York Stock Exchange and by 7 to 6 on Nasdaq in heavy trading.
Tech stocks apparently got a piece of good news after the market closed when Microsoft said its fiscal first-quarter profit rose 30%, beating Wall Street estimates.
Dell had tumbled $2.81 to finish at $38.50 on Tuesday after warning late Monday that rising prices for memory chips would cut into its fiscal third-quarter profits. And Intel plunged $4.25 to $65.13 after Merrill Lynch removed the stock from its “Top 10 Tech” list and replaced it with Xilinx, which added 44 cents to $68.63.
But the day began favorably for many stocks after the government said consumer prices rose 0.4% last month, in line with expectations.
That soothed fears that had been fanned Friday, when news of the biggest jump in wholesale prices in nine years triggered new concern that the Federal Reserve might aggressively raise interest rates to combat inflation.
Stocks’ gains faded Tuesday as trading wore on, however, as some investors sold into the rally. Also, bond yields rose late in the day after falling early on. The 30-year Treasury bond yield ended at 6.35%, up from 6.32% on Monday and at a new two-year high.
Traders said the bond market appears increasingly convinced the Fed will raise short-term interest rates a third time this year when its policymaking committee convenes Nov. 16.
To bearish investors, the tech stock sell-off--and the inability of the broad market to hold early gains--were proof that the latest decline has a long way to go. Valuations are too high and stock action too shaky to suggest a rebound, they say.
Greg Kuhn, general partner of Kamco Partners, a hedge fund in Easton, Pa., dismisses the notion that a so-called selling climax is about to put stocks back on an upward course. That widely held idea holds that stocks will soon be hit by a flurry of selling that will complete the 1999 decline.
That scenario occurred in each of the last two Octobers. Following sell-offs caused largely by foreign crises, the major indexes succumbed to a final spasm of selling that brought out bottom fishers and set the stage for a new rally.
A key difference between now and the last two Octobers, however, is the Fed’s interest rate stance. What’s more, the fact that so many people expect a V-shaped market recovery means that extremely bearish investor sentiment, usually a precursor for a rebound, is not yet present, some analysts say.
“Everyone’s looking for the wrong thing,” Kuhn said. “It’s going to take more downside before we can hit a solid bottom, and that’s going to take some time.”
Hedge fund manager David Ryan in Santa Monica agrees. To him, the latest rebound in drug stocks isn’t cause for elation but rather a sign that jittery investors are crowding into a traditionally “defensive” stock sector because they expect a lengthy downturn.
Few sectors have any strength, he said, hardly the conditions for a quick bounce.
“We’re going to have a bear market, a decline that’s just going to be grinding people down,” said Ryan, whose portfolio is 90% cash. “This could easily go on into early next year.”
Market Roundup, C10
