Trading Is Heavy as the Flight from Stocks Continues
Stocks slumped Tuesday in another wild session, as a key measure of the market’s fear level soared to heights last seen during the crash of 1987.
After several rally attempts collapsed, the Standard & Poor’s 500 index ended with a loss of 22.15 points, or 2.7%, at 797.70, leaving the blue-chip index about 10 points away from marking the worst bear-market percentage decline since the Great Depression.
The Dow Jones industrial average lost 82.24 points, or 1.1%, to 7,702.34. The Nasdaq composite index dropped 53.60 points, or 4.2%, to 1,229.05 as tech stocks helped pace the day’s decline.
Breadth was abysmal, as losers swamped winners by more than 4 to 1 on the New York Stock Exchange and by more than 3 to 1 on Nasdaq. Trading volume was heavy, with the NYSE recording its third-busiest day ever.
Once again there were few places to hide as investors dumped stocks across all size ranges and most industry sectors: The mid-cap S&P; 400 and the Russell 2,000 index of smaller stocks fell through their September lows, losing 3% and 4.1%, respectively.
The widely watched VIX, an index that measures expected volatility in S&P; 100 “put” and “call” options traded on the Chicago Board Options Exchange, soared to 50.5, topping the closing peak of 49.04 reached after the Sept. 11 terrorist attacks.
Like many other measures of market sentiment, the VIX appears to be indicating that the 28-month-long bear market is nearing an end, some say: Bear markets usually bottom when fear levels are highest.
Yet several technical analysts said this week’s VIX spike is far from a convincing sign of a market bottom. There is still too much investor complacency for their contrarian tastes.
“It’s an eyebrow-raiser and it’s something to watch, but it’s not a ‘Eureka!’ ” said John McGinley, editor of Technical Trends newsletter in Wilton, Conn. “Psychologically speaking, we’ve got to get to the point where people are saying they would never invest again. We’ve got to completely wash out the bull case.”
Chris Johnson, analyst at Schaeffer’s Investment Research in Cincinnati, agreed: “So far the VIX is bullish fodder that may bring in some buyers, particularly if we see higher spikes in the next few days. But it doesn’t represent exhaustion of the selling.”
Paul Rabbitt, portfolio manager at Rabbitt Capital in Hermosa Beach, said that although previous VIX spikes have marked at least near-term bottoms, corporate accounting scandals have created a different climate in this sell-off.
“Everybody is waiting for the other shoes to drop,” Rabbitt said, noting the Aug. 14 deadline for executives of the nation’s largest companies to certify the accuracy of their firms’ financial statements in filings with the Securities and Exchange Commission.
“Generally we’d see a market turn at a time like this, but I believe the weakness could stretch on for weeks because of the uncertainty,” Rabbitt said.
Johnson said that for the market to reach a solid bottom, “we may have to see a violent down day that just shakes investors out of the tree. People have grown so accustomed to 2% losses, I think it might be better for the market if you had a 10% drop.”
But others note that, precisely because many investors would be happy to see a one-day crash if it meant the bottom would finally be reached, the market is unlikely to be so accommodating.
From a more fundamental perspective, Rabbitt said stock mutual fund redemptions--believed to be accelerating for the second straight month, as more individual investors flee--could be “a dragon in a cave, waiting to come out” and further torture the market.
Among Tuesday’s highlights:
* At the day’s closing value, the S&P; 500 is down 47.8% from its March 2000 peak. If the decline extends beyond 48.4%, it will exceed the 1973-74 bear market loss.
* Among blue chips, General Electric fell 86 cents to $24.80 after saying it would cut 2,500 jobs at its power systems unit, citing slowing sales of large turbines.
* Sharp declines in J.P. Morgan and Citigroup, which are being investigated for their Enron dealings, also hurt the major indexes. J.P. Morgan dropped $4.44 to $20.08 and Citigroup slid $5.04 to $27.
* Microsoft led major tech stocks lower, falling $3.30 to $43.01. Intel lost 45 cents to $17.81, EBay dropped $2.89 to $53.16 and Cisco Systems fell 48 cents to $12.50.
Also, Novellus Systems lost $2.80 to $26.75 after trimming profit forecasts for the current quarter. Among other tech names, PMC-Sierra fell $1.06 to $9.11, USA Interactive sagged $2.55 to $18.16 and BEA Systems dropped 81 cents to $5.67. Comcast fell $2.65 to $18.40 as cable stocks slumped.
* Several consumer-products stocks bucked the trend, responding positively to second-quarter earnings news. 3M rallied $2.76 to $111.76, Gillette climbed $1.91 to $30.91, Colgate-Palmolive gained $1.89 to $47.20, Black & Decker jumped $3.54 to $40.37, and Kimberly-Clark added $3.01 to $56.01.
* Home builders rallied after Pulte Homes beat second-quarter profit forecasts. Pulte rose $2.97 to $43.79, KB Home gained $2.17 to $42.55 and Toll Bros. added $1 to $22.04.
* Overseas, stocks fell in Europe and Latin America but rose modestly in Asia. Leading indexes lost 4.8% in Germany, 2.5% in France, 1% in Britain, 1.5% in Brazil and 3.6% in Mexico. But Japan’s Nikkei 225 gained 0.3%.
A plunge in shares of many power companies hammered the junk-bond market, driving bond prices lower.
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Market Roundup, C6-7
