Stocks closed mostly lower Wednesday in a volatile session after a rally sparked by favorable economic news early in the session could not be sustained.
Benign reports on retail sales and producer prices in July put the inflation genie back in the bottle and sent the Dow nearly 80 points higher right after the opening bell.
“See, the sky isn’t falling,” said Ben Hock, director of equity research at John Hancock Funds.
But after the opening spurt, the market turned tail, with the Dow plunging about 160 points in just 45 minutes. It later returned to plus territory but fell again late in the session.
It now seems to take ever-stronger doses of good news to keep prices moving ahead–a classic symptom of an aging bull market.
The Dow Jones industrial average closed down 32.52 points, to 7928.32, following Tuesday’s drop of more than 101 points. New York Stock Exchange volume was heavy at 587 million shares, ahead of Friday’s expirations of stock and index options.
The Nasdaq composite index gained 7.16, to 1583.40. The Russell 2000 index of small-company stocks added 0.22, to 411.64.
Bond prices rebounded slightly, reflecting the day’s economic reports.
The dollar lost ground against the German mark on new speculation about higher German interest rates and a British newspaper report that Germany and France proposed to delay the January 1999 launch of the European monetary unit. Many analysts believe the Euro will be a weak currency.
Thursday’s report on U.S. consumer price inflation in July is expected to reiterate the tame inflation outlook. But there’s no doubt investors are skittish.
Mutual Fund Trim Tabs, a California firm that tracks cash flows into and out of mutual funds, reported that equity fund investors reacted strongly to Friday’s market sell-off, which took the Dow industrials down 157 points.
Stock funds suffered an estimated $3 billion in net outflows Friday and Monday, Trim Tabs said in its latest report. Combined with falling stock prices, mutual funds lost a total of $31 billion in net asset value over the two days. Aggressive growth stock funds saw their worst two-day outflow of the year, $1.65 billion.
Bond fund investors were less jumpy, despite Friday’s steep slump in bond prices. Net flows of cash into bond funds edged higher by $11 million in the two days.
Brian Reid, senior economist at the Washington-based Investment Company Institute, the trade association for the mutual fund industry, said bond investors tend to sit tight during downturns in the bond market.
In five major bond market contractions since 1975, net new sales of bond funds have slowed, but “there is no evidence that bond fund shareholders redeemed en masse during market breaks,” Reid said.
Among stocks in the news, California-based Applied Materials, a leading producer of fabrication equipment for making semiconductors, soared 10 percent after reporting better-than-expected quarterly profits late Tuesday.
On the other hand, the most-active NYSE stock was Micron Technology, an Idaho-based maker of semiconductors, which fell 15 percent–its second straight steep loss–amid speculation that prices for its type of computer chips would continue falling and that a shift to faster memory chips would leave Micron with a surplus of outdated chips.
NASD bulletin: Frank Zarb, chief executive officer of the National Association of Securities Dealers, the self-regulatory organization of the nation’s securities brokers and dealers, says it’s time for brokers to take more responsibility for the small, speculative stocks they post on the so-called over-the-counter bulletin board.
On a visit to Chicago, Zarb said Wednesday his organization has been taking a bad rap for the investor ripoffs committed via the bulletin board, which is not part of the Nasdaq stock market but is operated by NASD through an agreement with the Securities and Exchange Commission.
“If we didn’t have to, we wouldn’t be in it,” Zarb said. “We plan a wide range of initiatives to put pressure on that market to lift its standards. We will undoubtedly put enough heat on it that some companies will have to leave the bulletin board.’
The OTC bulletin board is an electronic system in which stock dealers can advertise current share price quotes for companies that are not subject to Nasdaq listing requirements and often provide investors with little or no information about themselves.
Many investment scams, using high-pressure telephone sales and Internet come-ons, occur via the OTC bulletin board. Trading in speculative bulletin board stocks has been linked to convicted felons and organized crime.
“At the moment, we have zero authority over these issuers (of stocks quoted on the bulletin board), but broker/dealers have a responsibility to know about the companies they make markets in. That knowledge should be available to the public.”
Local news: Intercargo, Schaumburg, an underwriter of customs bonds and marine cargo insurance, agreed to allow Orion Capital to increase its stake in the company to 35 percent from 25 percent.
– Wesley Jessen VisionCare plans a secondary offering of 4 million shares, of which 3.5 million shares will be offered by existing shareholders. The marketer of specialty soft contact lenses currently has 7 million shares outstanding.
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