Blue Chips Rally Sharply but Narrowly

NEW YORK — Shaking off the effects of last Friday’s plunge, the stock market rebounded smartly Monday afternoon, as investors seemingly refused to throw in the towel.

The Dow Jones industrial average, down as much as 76 points during the day, gained more than 170 points in the last two hours of trading to close at 7,803.36, up 108.70 points, or 1.4%.

The rally, while sharp, was confined to a relatively small number of stocks, however, and it failed to convince some experts that the market can resume its smooth upward march.

In fact, despite the Dow’s gain, losing stocks narrowly outnumbered gainers both on the New York Stock Exchange and Nasdaq. Trading volume was moderate.

“Things are still relatively shaky overall,” said Steven Check of Check Capital Management in Costa Mesa.

Check expects only single-digit percentage gains from stocks over the next year, which would be a poor showing compared with the 23% run-up in the Standard & Poor’s 500-stock index so far this year and the S&P;’s 20% advance in 1996.

To others, the importance of Monday’s market action was that investors did not panic after last Friday’s harrowing session, when the blue-chip index plunged 247 points, or 3.1%, its worst percentage drop in six years.

“It seemed apparent from early in the day [Monday] that the small investor was going to stay put,” said Alan Ackerman, market strategist at Fahnestock & Co.

“The bull market is intact,” Ackerman declared, predicting that if interest rates remain stable and inflation moderate, the major indexes will climb higher still by the end of this year.

The Federal Reserve Board’s Open Market Committee, which makes interest rate policy, is meeting this morning in Washington, but, with little sign of rising inflation, few expect the panel to boost rates.

Anticipating no Fed action, the bond market rallied Monday for the third time in the last four sessions. The yield on the benchmark 30-year Treasury bond, which moves in the opposite direction from bond prices, dipped to 6.52% from 6.54% on Friday.

Also helping U.S. stocks: The dollar rose modestly, after a German central bank official quashed speculation that the Bundesbank will raise interest rates soon to defend the mark.

Despite Monday’s Dow rally, some market watchers believe that the largest and most popular U.S. stocks, which have led the bull market for several years, will be outperformed by smaller stocks in the months ahead.

“Small companies are looking more and more attractive because the valuations aren’t so high,” said Gary Craven, co-chief investment strategist for Evergreen Keystone Funds in Boston.

Friday’s sell-off was sparked in large part by news that Coca-Cola and Gillette might fail to meet analysts’ expectations for their third-quarter earnings.

“Ordinarily, that wouldn’t cause a significant decline in overall stock prices, but when you see that big a reaction, it dramatizes the valuation problem,” said Hugh A. Johnson Jr., chief investment strategist at First Albany Corp. The big stocks “moved too far and too fast and got way overvalued,” he said.

Overvalued they may be, but it was some of the biggest names that fueled Monday afternoon’s rebound. IBM, for example, leaped $4.06 to $104; Exxon rose $3.19 to $62.19; and General Electric gained $2.63 to $66. All had lost ground Friday.

Broader indexes were up more modestly Monday. The Nasdaq composite index rose 7.50 points to 1569.53, rebounding from a 16.53-point loss Friday. The Russell 2,000 small-stock index was up 0.15 point to 408.73 points, recovering a bit of last Friday’s 3.29-point drop.

Since hitting an all-time high of 8,259.31 on Aug. 6, the Dow has dropped 5.52%--a fairly modest decline, considering that in July alone it had gained 7.2%.

The decline in stock prices has been global, hitting hardest in Southeast Asia in recent weeks but also spreading to Europe.

Johnson isn’t ready to write an obituary for the 7-year-old domestic bull market, calling the recent downturn “only a correction.”

But the big recent swings, culminating in last Friday’s plunge, had him and other experts worried that market newcomers might lose their cool and suddenly decide to cash out en masse.

Johnson was so concerned that on Sunday he phoned branch managers at the brokerage to ask about skittishness among their customers.

The sales people told Johnson that many of their investors continue to see market dips as buying opportunities and were unlikely to cut and run.

“There was no hysteria at all,” agreed Suzanne Zak of the institutional money management firm Zak Capital in Minneapolis. Then she added, “But maybe everybody’s on vacation.”

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Global Pullback

Wall Street’s decline in recent weeks has been matched or surpassed by declines in many foreign markets, especially in Southeast Asia, where economies are reeling from currency devaluations.

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Market (index) Mon. close Mon. change Decline vs. ’97 peak Hong Kong (Hang Seng) 16,096.88 -2.4% -4.3% U.S. (S&P; 500) 912.49 +1.3% -5.0% Mexico (Bolsa) 4,952.88 -0.1% -6.1% France (CAC) 2,870.13 -1.8% -7.6% Germany (DAX) 4,078.60 -1.8% -8.5% Japan (Nikkei) 19,041.10 -1.5% -8.9% Brazil (Bovespa) 11,338.00 nil -19.0% Indonesia (compos.) 599.64 -2.9% -19.3% Thailand (SET) 604.34 -3.0% -30.6% Malaysia (compos.) 880.45 -3.3% -31.1%

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Source: Times research