Dow steps back from brink/Kolumne chicago.tribune

Dow steps back from brink
Blue chips join slide as buy-sell battle intensifies


March 23, 2001

Here are three little words that thrill the hearts of short-sellers: dollar cost averaging.

Much is being said?that is, screamed?about the epic battle under way between bulls and bears on Wall Street, the buyers and sellers.

In Thursday's session, the Dow Jones industrial average dipped into bear-market territory?a 20 percent decline from its peak in January 2000?as it fell more than 380 points, but managed to claw its way out.

It's great programming for cable television and fabulous material for headline writers.

But the real game now under way is more subtle. It concerns two sets of players who see potential profits on the downside.

One group is selling the market short, meaning they are selling borrowed shares in hopes of lower prices. Many institutional investors are doing a brisk business lending shares to short-sellers and collecting interest on their loans.

The other group, which includes many holders of 401(k) accounts, is buying steadily through the decline in hopes of greater rewards on the rebound. Dollar cost averaging requires market dips to reduce the average cost of investing. The lower the dip, the greater the payoff.

Both sides feed off of each other. So far, neither has thrown in the towel.

But in recent weeks, the game has shifted from technology stocks to the broad market.

As everyone knows, the stock market debacle of the last 12 months was concentrated in the tech sector.

From the March 10, 2000, peak in the Nasdaq composite index, nine of the 11 major sectors of the Standard & Poor's 500 index advanced through March 13, 2001, with an average weighted gain of 21.3 percent, according to James Bianco of Bianco Research.

"The stock market excluding technology stocks appears still to be in a bull market," he said.

In recent days, however, the sell-off widened, as so-called old economy stocks and financial service stocks fell out of bed. Even utilities, which were big winners in last year's tech wreck, fell sharply.

In Thursday's session, only technology stocks posted a gain out of the 11 major S&P 500 industry sectors?a 180-degree reversal of the 12-month pattern.

As a proxy for current market trends, I studied trading in two popular exchange-traded funds listed on the American Stock Exchange: the Nasdaq 100 Index Tracking Stock, called Qubes, and the so-called Diamonds, based on the Dow Jones industrial average.

These hybrid products can be sold short even when their prices are falling?contrary to the uptick rule governing short-selling in individual stocks.

Short interest?the number of shares sold short and not yet repurchased?peaked last summer for Qubes and Diamonds, measured as a percentage of trading volume in the shares.

But last month, short interest in Diamonds began to accelerate, while short interest in Qubes stabilized. In March, trading volume in Diamonds has soared, while volume in Qubes has held steady.

As the Dow industrials joined the market slump, the field of battle has broadened to engage dollar-cost-averagers and short-sellers in the most liquid stocks and financially strong companies.

Smart investors have long since quit using the dollar cost averaging approach to buying tech stocks. The future of this sector is too clouded to justify buying on the way down.

Those still holding tech stocks essentially own a lottery ticket, Bianco said. Buying more lottery tickets barely increases the odds in your favor. The shorts won that battle.

But dollar-cost-averagers are on much firmer ground as the selling shifts to the broad market. A few upbeat surprises in the economy or corporate earnings outlooks will squeeze the short-sellers hard.


Thursday's action: The Dow Jones industrial average on Thursday rallied from bear-market territory in heavy trading, led by newfound strength in technology stocks.

Only eight of the 30 Dow industrials managed to post a gain, but among them were advances by Hewlett-Packard, International Business Machines, Intel and Microsoft.

The Dow closed down 97.52, or 1 percent, at 9389.48. Earlier in the session, the Dow hit 9106.54. A 20 percent bear-market decline from the Dow's peak in January 2000 would be a close at 9378 or less.

New York Stock Exchange trading volume reached 1.74 billion shares, the greatest volume since Jan. 4, the day after a surprise cut in short-term interest rates by the Federal Reserve.

Losing stocks outnumbered winners nearly 3-1 among NYSE-listed stocks, a sign that pessimism still rules on Wall Street.

The Nasdaq composite index jumped 67.47, or 3.7 percent, to 1897.70, on Nasdaq trading volume of 2.49 billion shares. Losers topped winners about 4-3.

Semiconductor stocks rebounded 12 percent, according to the index of semiconductor stocks tracked by the Philadelphia Stock Exchange, although the index remains less than half its level of a year ago. Sector leader Intel added $3.12, to $28.69, as the second-most-active Nasdaq stock.

All but one of the 10 most active Nasdaq stocks posted a gain. Among local tech stocks, Aurora-based Cabot Microelectronics jumped 23.5 percent, to $47.31.

Treasury prices advanced amid the stock sell-off.

Late Thursday, a major Japanese insurance company, Tokyo Life, filed for bankruptcy protection in what could be a cascade of financial institution crises as Japan's fiscal year ends March 31.


Oops: Mutual fund tracker Lipper, a unit of Reuters, said Thursday it erred big time in reporting that investors pulled $11.4 billion in net redemptions out of equity mutual funds last month. This column and many other news outlets noted the report.

In fact, the net redemptions were just $2.4 billion, the first net redemptions since the global economic scare of August 1998, but hardly a catastrophe.

"We deeply regret the error," said Sarah Dunn, chief executive of Lipper. The error occurred in calculating net cash flow in so-called equity income funds, which were virtually unchanged last month.

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