Stocks sank Thursday in a crescendo of investor skepticism that has been building for weeks. Trading volume was the heaviest in five years.
Just a week after celebrating a move above 14,000, investors sent the Dow Jones industrial average down 311.50 points, or 2.3 percent, to 13,473.57. In turn, Treasury securities staged a powerful rally, sending interest rates lower, as investors sought safe investments.
“Remember when everybody was talking about 14,000 on the Dow?” said Paul Nolte, money manager at Hinsdale Associates. “Now, that breakout has become a fake-out.”
Moreover, the Standard & Poor’s 500 index also closed down 2.3 percent, at 1482.66. That put the benchmark index below its June low of 1490 for the first time this summer, a red flag to technical market analysts.
It was the biggest one-day drop in the market since late February, when fear gripped Wall Street in the wake of a sell-off in Chinese stocks.
“This one was a little bit closer to home,” said James Herrick, head of equity trading for Robert W. Baird & Co.
Although the day’s tumble began in Europe, investors focused on domestic concerns, especially the weakening U.S. housing market, defaults in subprime mortgages and the debt-driven corporate acquisition boom.
“What’s concerning investors is that this is just the tip of the iceberg,” said Herrick. “Every day it seems like there is another shoe that drops, whether it’s subprime difficulties or use of excessive leverage at hedge funds or the highly leveraged consumer sector.”
Treasury Secretary Henry Paulson, a Wall Street veteran, downplayed Thursday’s market action.
“We’re always going to have volatility,” he told Bloomberg television. “We’re all fortunate that we have a strong global economy. It’s the strongest global economy I’ve seen in my business lifetime. We have a healthy economy in the U.S.”
But beneath the headlines, the stock market has displayed an undercurrent of doubt for weeks.
Louise Yamada, head of Louise Yamada Technical Research Advisors and one of the best-known technical market analysts, told her clients in late June that a significant decline was brewing.
Problems have been emerging since March, after stocks bounced back from the February slump, Yamada said. Record highs reached in major stock indexes this summer have masked the fact that fewer stocks were gaining.
“You’ve had declining participation of stocks going up,” she said. “People are using rallies to sell into strength. We developed a multimonth progression of selling under the surface.”
A fresh technical worry is the 1447.60 mark for the S&P 500 index, said analyst Cleveland Rueckert at Birinyi Associates. That number represents the current 200-day moving average of the S&P 500.
Even at the worst of Wall Street’s February swoon, the S&P 500 did not break below its 200-day moving average.
“That’s the next stopping point,” said Rueckert.
In addition to the well-known litany of investor concerns, two sparks to Thursday’s selling erupted among the Dow industrials.
Oil giant Exxon Mobil surprised traders by posting its first decline in quarterly profit in more than three years. Exxon, which dropped $4.56, or nearly 5 percent, to $88.23, was the biggest contributor to the decline by the Dow and the broader S&P 500.
Another Dow stock, Alcoa, sank $2.91, or more than 7 percent, to $38, after Goldman Sachs said the company was unlikely to attract a buyer. Rumors of an Alcoa takeover, akin to the proposed $38 billion buyout of rival Alcan, had swirled through early summer.
Richard Bernstein, chief investment strategist at Merrill Lynch, said it was time to stop betting on the next debt-financed takeover deal.
Paulson said he would “like to see more discipline” among lenders and borrowers.
“The market will ultimately demand more discipline,” he said.
But beyond the Alcoa news, investors saw little fresh information about the credit worries.
“I don’t think there was any real news, which makes this decline more suspect,” said Bruce Bittles, chief investment strategist at Baird. “One that can be explained away is not so bad.”
Stock prices rebounded slightly in late trading, after the Dow had lost nearly 450 points earlier in the session.
“It was an orderly sell-off,” said Herrick.
But looking forward, Yamada said, it’s not time to be courageous as an investor.
“We’ve got some of our indicators with deeply oversold readings,” she said. “Contrary to the trading belief, you don’t want to buy oversold. Oversold is empirical evidence of selling pressure. We have essentially moved to the sidelines. You don’t want to catch a falling sword.”
Nolte said disgruntled investors might exploit market gains to get out of stocks.
“You get investors saying, ‘I don’t want to take big losses here or add to my losses,'” he said.
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bbarnhart@tribune.com
