Investors went bargain-hunting Friday, stocking up on blue chips and computer chips in the wake of Thursday’s dramatic sell-off.
After losing nearly 380 points Thursday, the fifth-biggest point loss ever, the Dow Jones industrial average–perhaps predictably–bounced back on Friday, gaining 157.60 points, or 1.6 percent, to 10,192.18.
The bigger move came from the beleaguered Nasdaq composite index, which gained 242.09 points, or 7.9 percent, to 3316.77. It was the third-highest point gain and second-highest percentage gain for the index.
Semiconductor stocks led the tech advance after analysts started discounting earlier fears about waning demand for computers and mobile telephones.
“Valuations are starting to support the market, so it’s not surprising that [investors] are starting to bite,” said Richard Jandrain, chief investment officer for Banc One Investment Advisors.
In fact, Friday’s gains solidified the buy-on-dips pattern that has breathed life into the bull market at several critical junctures over the past few years. The Dow’s five biggest point drops–including Thursday’s–were all followed by a substantial bounceback in the next trading session, although Friday’s was the smallest on a percentage basis.
In the case of the other four drops, the Dow was even higher a month after the fall.
The pattern has been put to the test by the Nasdaq’s rocky journey this year. All of its biggest point drops have been this year, and four of the top five came during April’s wrenching slide, when buyers were scarce.
“The Nasdaq has been through a substantial correction,” Jandrain said.
Finally, after six straight declines, investors felt comfortable coming back in on Friday, he said.
“A lot of risk is discounted going from 5000 to 3000,” he said of the Nasdaq.
And, clearly, risk remains. Beyond the violence in the Middle East that shook the markets Thursday, economic factors are unsettling: As the economy slows, company after company has revised earnings estimates downward or reported disappointing results.
But even the specter of inflation couldn’t derail Friday’s rebound: The government reported that wholesale prices and retail sales each gained 0.9 percent in September, news that otherwise might have sparked a market pullback.
Surging fuel prices ignited the increase in the producer price index; the so-called core rate, excluding often-volatile food and energy components, rose 0.3 percent.
Helping the market were positive earnings reports from Gateway and Juniper Networks, relieving investors who have been concerned by other reports in the tech sector.
“It’s still too early in the reporting period to properly analyze actual third-quarter results,” Goldman Sachs strategist Abby Joseph Cohen wrote in a client letter Friday.
But of those few companies in the Standard & Poor’s 500 that have reported, 70 percent have come in above expectations, Cohen noted in the bullish report.
After Thursday’s sell-off, Cohen figured the S&P 500 was 15 percent undervalued, improving stock valuations. “This is a fairly large buffer against fundamental disappointments, should they occur,” she wrote.
But events in the Middle East are the wild card, she noted, suggesting that “the probability of an intentional disruption of energy supplies has increased.”
Among the recently suffering Chicago-area companies benefiting from the tailwind were Schaumburg-based Motorola, up 9.6 percent, to $22.12; Lisle-based Tellabs, which gained 10.1 percent, to $46.25; and Chicago-based Bank One, up 6.3 percent, to $33.87.
BLUE-CHIP BOUNCEBACK
Each time the Dow Jones industrial average has posted one of its top five point drops ever–including Thursday’s–buyers have rushed in during the next trading session. Previously, the buy-on-dips strategy has paid off over the next week and month as well–but not with the Nasdaq composite index, which clumped many of its biggest losses during April’s tech wreck and has yet to recover.
Day of drop Next session pct. change One week
pct. change* One month
pct. change
?6 Dow Jones industrial average
%%
April 14, 2000 +2.7 +5.8 +4.9 Oct. 27, 1997 +4.7 +7.2 +9.2 Aug. 31, 1998 +3.8 +6.4 +4.0 Oct. 19, 1987 +5.9 +3.2 +9.0 Oct. 12, 2000 +1.6 — — %%
Nasdaq composite index
April 14, 2000 +6.5 +4.8 +8.6 April 3, 2000 -1.8 -0.8 -12.2 April 12, 2000 -2.5 -1.7 -6.4 April 10, 2000 -3.1 -15.5 -19.2 Jan. 4, 2000 -0.6 +0.5 +8.8
?6 *Change over next five sessions.
Source: Dow Jones, Bridge
%% %%
