Stocks pull a 286-point turnaround
Has Wall Street ceded control to the day traders?
For the Dow Jones industrial average, Monday looked a lot like Friday -- just in reverse.
Some upbeat news from the battered financial sector drove the blue-chip Dow up 286.87 points, or 2.2%, to 13,468.78, recouping all of the 281.42 points it lost in the previous session. The broader market also was sharply higher.
Although the rebound was encouraging to market optimists, stocks’ increasingly violent swings may be frightening away the long-term investors whose presence could help stabilize prices, some analysts say.
Monday’s move in the Dow marked its biggest percentage gain in four years, and the fifth time in 11 sessions that the index had swung more than 200 points, up or down.
The volatility is “a sign of people not wanting to hold positions for too long,” said Todd Salamone, an analyst at Schaeffer’s Investment Research in Cincinnati. And lately, he says, “too long” might mean just a few hours, before news erupts to spark either a selling binge or a buying frenzy.
The main force behind the market’s recent volatility, including Friday’s big dive: worries that the housing sector’s woes are spreading in the economy and financial system, as more homeowners default on their mortgages.
But there was a break in the clouds Monday. Rumors circulated early in the session that mortgage-finance giants Fannie Mae and Freddie Mac, federally chartered companies that invest in home loans and mortgage securities, were asking their regulator for permission to raise their investments in home loans. That could help supply fresh capital to the troubled mortgage market.
Shares of Fannie Mae and Freddie Mac surged, helping to bolster beaten-down financial stocks, which have led the market’s decline the last two weeks.
Also giving the financial sector a lift: Brokerage UBS upgraded shares of rival Merrill Lynch to “buy” from “neutral,” saying the stock had gotten cheap. Merrill jumped $4.50, or 6.4%, to $74.55 after tumbling 26% from mid-May to Friday.
Once the rally in financial stocks began, “short covering” helped keep it going, analysts said.
In a short sale, a trader borrows stock and sells it, betting the market price will drop. If the stock indeed slides, the trader can repay the loaned stock with shares bought for less in the open market.
Wall Street’s tumble since July 19 has meant fat paper profits for short-sellers. On Monday, some of them were buying stock to close out their bets, adding fuel to the market’s rebound, Salamone said.
A steep drop in the price of oil from last week’s all-time highs helped improve the mood as well. Near-term crude futures in New York slid $3.42 to $72.06 a barrel.
And some investors may have been betting that Federal Reserve policymakers, who hold their midsummer meeting today, will offer some “soothing words” for markets, said Steve Todd, editor of the Todd Market Forecast in Crestline.
Policymakers are expected to keep their key short-term interest rate at 5.25%, where it has been since June 2006. But they could reiterate in their post-meeting statement that they believe the U.S. economy can withstand the housing sector’s slump.
Still, some analysts say long-term investors are unlikely to rush to put fresh cash to work in stocks, given the risks posed to the financial system by rising losses on sub-prime mortgage-backed bonds and other high-risk debt.
“We have a threat in the market and we don’t know how big it will be,” said Ernie Ankrim, investment strategist at Russell Investment Group in Tacoma, Wash.
Until investors get a better handle on that, the market could be left largely in the hands of short-term traders for the time being.
And that means, Salamone said, that “one negative headline tomorrow could change everything.”
Among Monday’s market highlights:
The Standard & Poor’s 500 index topped the Dow’s gain, rallying 34.61 points, or 2.4%, to 1,467.67. It was the biggest percentage advance in the index since April 2003. But the S&P; failed to completely recoup all of what it lost Friday, when it sank 2.7%. It’s up 3.5% this year.
Small-stock indexes posted far weaker gains than big-stock gauges -- a sign of investors’ caution, some analysts said. The Russell 2,000 index rose 1.4% after tumbling 3.6% on Friday.
The technology-dominated Nasdaq composite also lagged the Dow. The Nasdaq added 36.08 points, or 1.4%, to 2,547.33, after sliding 2.5% on Friday.
Todd, the newsletter editor, said it was discouraging that rising stocks outnumbered losers by the slim margin of about 8 to 7 on the New York Stock Exchange.
Bear Stearns surged $5.46 to $113.81 after falling as low as $99.75 early in the session. The brokerage’s stumble in the mortgage-backed securities market -- two of the firm’s hedge funds that invested in those securities went belly-up in June -- has been a major drag on financial-sector stocks in recent weeks.
Bear Stearns executives helped to fuel Friday’s stock market plunge after they said conditions in the bond market were among the worst they’d seen in two decades, as investors balked at buying risky securities.
Among other financial-services giants, Goldman Sachs jumped $8.11 to $187.79, insurance giant American International Group surged $2.92 to $64.56 and Countrywide Financial rose $1.75 to $26.75.
Also, Fannie Mae soared $5.87 to $62.50 and Freddie Mac rallied $4.30 to $60.
Wells Fargo, one of the nation’s biggest mortgage lenders, gained $1.95 to $34.76 after saying its board authorized the company to buy back 50 million shares over time, or about 1.5% of the outstanding stock. Wall Street typically views buyback announcements as a sign that corporate managers believe their shares are undervalued.
Industrial stocks may have attracted bargain hunters. Many of the companies are expected to continue to benefit from strong overseas economic growth and from the weak dollar. Caterpillar rose $2.04 to $81; PPG Industries was up $1.78 to $78.06.
Energy stocks were mixed as crude prices declined. Exxon Mobil rose $1.46 to $83.54 and Chevron added $1 to $82.02, but Occidental Petroleum was off 97 cents to $54.29.
Treasury bonds, which have benefited in recent weeks as some investors have sought a haven from stocks’ turmoil, were hit by selling as Wall Street rebounded. The yield on the 10-year T-note rose to 4.74% from 4.68% on Friday.
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