After a wild day, are sellers done?
Judging from the phone calls he got Tuesday morning from individual investors, mutual fund manager Don Hodges thinks the battered U.S. stock market may be reaching at least a short-term bottom.
As share prices plunged at the outset of trading, Hodges said he took calls from several nerve-racked investors who said they were bailing out of the market.
That’s the kind of panic that often denotes the latter stages of a sell-off, said Hodges, who manages the Dallas-based Hodges Fund stock portfolio.
Investors were “listening to CNBC and getting [their] pants scared off,” he said. “I can tell you after being in this business for 48 years that every time I’ve ever seen that it’s been a mistake. On 9/11 or in 1987, people who jumped out after the market had been bad for a while came to regret it.”
Stocks on Tuesday endured one of the most harrowing sessions of the latest downturn, with the Dow Jones industrial average plummeting 465 points, or 3.8%, before recovering two-thirds of its losses to close down 128.11 points, or 1.1%, at 11,971.19.
In one sense the day was a disappointment: Most major U.S. indexes lost ground even though the Federal Reserve slashed its key short-term interest rate to 3.5% from 4.25% before the opening bell.
Still, many on Wall Street were encouraged that the Dow and other market measures finished well above their morning lows. What’s more, there were other signs -- including extraordinarily heavy trading volume -- that the selling could be exhausting itself, at least for the moment.
Some analysts aren’t so sure. Bearish investors believe that the U.S. economy is falling into a recession that could slash corporate earnings and pull share prices much lower over time.
The Fed reacted after foreign stocks were hammered Monday and early Tuesday by fears that U.S. economic woes would spread and choke off what until recently had been a vibrant global expansion.
The severe losses overseas threatened to upend Wall Street, which had been closed Monday in observance of Martin Luther King Day.
The Fed’s announcement apparently failed to give pause to many sellers who were waiting to dump shares as trading began. But the market began to rebound within minutes of the opening, then went flat for most of the rest of the session.
The Standard & Poor’s 500 index ended down 14.69 points, or 1.1%, at 1,310.50, as losers outnumbered winners by 4 to 3 on the New York Stock Exchange.
The technology-heavy Nasdaq composite finished with a loss of 47.75 points, or 2%, at 2,292.27.
The Dow, the S&P; 500 and Nasdaq all are at their lowest levels in at least 14 months.
Markets in Europe and Latin America seemed to draw more encouragement from the Fed’s action.
Britain’s FTSE 100 index rebounded 2.9% after diving 5.5% on Monday. The Mexican market rocketed 6.4% after tumbling 5.4% on Monday.
Investors normally cheer Fed rate cuts because they signal the potential for an improving economy.
But it isn’t clear that the normal tonic of lower rates will bring about a quick recovery for the ailing housing market or for banks and brokerages struggling with massive losses on mortgage-related securities.
Recession fears have hammered stocks worldwide in recent weeks, leading up to the selling wave that swept foreign markets beginning Monday.
Frantic dumping of stocks often occurs at market bottoms, analysts note. Such selling can signal that so-called weak holders -- those most likely to exit when bad news hits -- are clearing out. That can leave the market in the hands of bargain hunters who, sensing the worst is over, get in and gradually push up prices.
“Any time you get indiscriminate selling, you’re getting close to a turning point in the market,” said Ron Sloan, manager of the AIM Charter fund.
At one point Tuesday morning, about 55,000 customers were logged into their accounts at online brokerage E-Trade Financial.
That was a record for the number of people signed on at a given moment, a spokeswoman said -- although she wouldn’t comment on whether small investors were doing more buying or selling.
Some market pros pointed to a gauge of investor anxiety known as the VIX index, which measures activity in stock index “put” and “call” options: the higher the index, the greater investors’ concern about future market volatility. But rising anxiety about volatility often marks the end of sell-offs rather than the beginning.
The VIX closed at 31.01 on Tuesday, up from 27.18 on Friday. The last reading above 30 was in mid-November, shortly before the market bottomed during that phase of the sell-off. Before that, the index spiked above 30 in mid-August, just before stocks began to rebound from the first sell-off tied to surging mortgage delinquencies.
“You’re getting very close to measures where you normally find a bottom in the market,” said Duncan Richardson, chief equity investment officer at money manager Eaton Vance in Boston.
Even if the selling ebbs, however, it isn’t clear that the bulls can hold the upper hand for long. If economic data in the next few weeks suggest the outlook is deteriorating, more investors may flee stocks.
But Hodges said he figured that he’s already getting stocks at bargain levels, even if the market has further to drop.
“At the prices we’re paying, we can live with it,” he said.
Among Tuesday’s market highlights:
* Utility stocks were among the session’s big losers. The shares had held up relatively well in recent weeks, so some investors may have opted to take profits. The Dow utility index sank 3.4%.
* The day’s losses left the Dow down 15.5% from its record high set in October. The Nasdaq index is down 19.8% from its 52-week high. Once an index falls more than 20% from its recent peak, it’s considered to be in a new bear market.
* Investors continued to drive down yields on Treasury securities, betting on more Fed rate cuts. The six-month T-bill yield dived to 2.35%, the lowest since 2004, from 2.84% on Friday. The 10-year T-note slid to 3.48% from 3.63% on Friday.
* In commodities trading, oil futures eased 72 cents to $89.95 a barrel. Gold futures gained $8.80 to $889.60 an ounce as the Fed’s rate cut pushed the dollar lower against many currencies.
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tom.petruno@latimes.com
