Renewed Optimism Sends Stocks Soaring

Stocks soared Monday, lifting key indexes by more than 5% for the day, as the panic to exit the market in recent weeks gave way to a rush to get back in.

Many investors apparently returned from the weekend more certain that Wall Street’s devastating summer decline has run its course--though analysts cautioned that isn’t a foregone conclusion.

The Dow Jones industrial average zoomed 447.49 points, or 5.4%, to 8,711.88, its third-biggest one-day point gain ever. Broader market measures also rocketed.

Added to the gains recorded late last week, the blue-chip Dow has risen 1,009 points in four sessions.

For professional money managers and small investors alike, the rally that started last Wednesday has been a welcome relief, after 10 weeks of nearly relentless selling tied in part to the financial scandals that have tainted corporate America.

Yet many experts are reluctant to declare the end of the 28-month-long bear market--the worst in a generation--which drove major indexes to five-year lows last week.

“The market made a bottom last week. Whether it will hold--whether it will be the bottom--ultimately that will depend on the economy,” said Rod Smyth, chief investment strategist at Wachovia Securities in Richmond, Va.

In Europe, stocks also rallied sharply Monday, with key indexes posting their biggest one-day gains in 15 years.

On Wall Street, analysts said the market got a lift from a rebound in the dollar’s value against the euro and the yen, suggesting that global investors are shifting money back to the U.S. The dollar had plunged with U.S. share prices from May through mid-July as many foreign investors sold American holdings.

“The dollar depreciated too rapidly based on the assumption that the stock market would continue to fall and that a ‘double dip’ recession was in the works,” said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. “Traders overreacted and assumed the worst case, and now they are back-tracking.”

The sense that Wall Street’s summer sell-off has finally exhausted itself began to take hold last Wednesday, when the Dow leaped 488 points after Congress reached a deal on a landmark corporate reform bill.

Over the weekend, institutional and foreign investors were cheered by the surprise House vote on Saturday giving President Bush broader authority to negotiate trade pacts with other nations.

Those developments helped break through the gloom that has dominated trading on Wall Street since May, experts said.

Many investors have worried that the U.S. economy would fall back into recession. But those fears also have been receding in recent days.

Kevin Marder, Los Angeles-based market strategist at Ladenburg Thalmann Asset Management, noted Monday that some of the strongest stock sectors were those in economy-sensitive sectors.

The technology-dominated Nasdaq composite index jumped 73.13, points, or 5.8%, to 1,335.25.

But Marder also noted that trading volume Monday was below recent peaks, suggesting some investors were reluctant to join the fray.

Analysts also warned that much of Monday’s surge may have been tied to short-term trading tactics employed by professional investors.

Many institutional investors, such as hedge funds and computerized “program traders,” could see from the opening bell Monday that the market rebound that started Wednesday still had legs--and they weren’t going to be left behind, said Hank Camp, founder of the program-trading research and consulting firm HL Camp & Co. in Palm Beach, Fla.

Hedge funds make massive bets on stocks, bonds, currencies and other financial instruments, often using borrowed money to get the most bang out of their investment picks.

In program trading, money managers have their computers programmed to automatically place buy and sell orders whenever stocks and/or stock-futures prices hit certain levels. Some hedge funds employ program trading as part of their strategy.

In many cases, both hedge funds and program traders also “short” stocks--that is, they sell borrowed shares with the hope that prices will fall, so they can buy them back later at cheaper prices and pocket the difference.

When they repurchase shares to close out their transactions, it’s called covering. Short covering was a key driver behind Monday’s surge, with traders scrambling to avoid seeing their short-selling profits shrink or vanish as the market moved higher, analysts said.

“These institutions are not taking any chances on losing their paper profits, so they’re covering,” Camp said.

Though investors may feel whipsawed by recent gyrations, financial analysts called Monday an example of how people can miss dramatic gains by being on the sidelines even for one day.

“We have one client who said, ‘Don’t buy until we see three up days in a row,’ ” said Laura Tarbox, a financial planner in Newport Beach. “Well, she’s missed out on 15% worth of upside.”

Still, Tarbox cautioned, “It’s yet to be seen whether this rally can be sustained. I certainly hope so, because we’ve been counseling people to hang in there for so long.”

Since their spring 2000 peaks, the Standard & Poor’s 500 and the Nasdaq are down 41% and 74%, respectively.

Though many analysts blame hedge funds and other fast traders for the market’s recent swings, some say corporate earnings and the economy still are fundamental question marks facing investors.

Major blue chip companies are expected to show about a 1% overall gain in second-quarter profit once all have reported, said Chuck Hill, research director at Thomson First Call in Boston. That would be the first year-over-year gain since the fourth quarter of 2000.

But analysts’ estimates for the third quarter are falling rapidly, Hill said. Since July 1, profit growth projections for this quarter have slowed from 16.6% to 13.1%.

“The pattern has changed,” Hill said. “We’re telling people to enjoy the second-quarter numbers, but don’t enjoy them too much.”

Smyth said he expects the stock market to “chug along” during the summer. “If in September and October it looks like we’re headed back to recession, I have a feeling we’re headed back through the lows,” he said.

Meanwhile, the Aug. 14 deadline for top corporate executives to verify their financial statements is “bound to bring out some more revelations” over the next two weeks, he said.

In spite of the market’s recent turbulence, some financial advisors say investors are taking it in stride.

Doug Grover, district manager at the Riverside office of money-manager Waddell & Reed Inc., said Monday that its individual clients weren’t rushing back into stocks because “very few of our clients had gotten out of the market.”

They’ve generally stayed the course by investing steady amounts into mutual funds, and had grown “very unhappy” with the sinking value of those funds, Grover said.

But on Monday, “their mood was positive, upbeat, and they’re glad things seem to be turning around,” Grover said. “They’re saying it’s about time.”

Individual investors are definitely looking at the market with renewed optimism in recent days, reported Charles Schwab & Co., the big discount brokerage house.

“They’re walking in with checks and starting to buy again,” said Schwab spokesman Morrison Shafroth after a spot check of several branches. And at some of Schwab’s telephone-ordering centers, calls from investors Monday jumped about 50% from their daily levels in mid-July, he said.

“Clients are feeling more confident about the direction of the market,” Shafroth said.