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Dow Plunges 51.98 as Dollar, Bonds Trigger Sharp Selloff

September 02, 1987|MICHAEL A. HILTZIK | Times Staff Writer

NEW YORK — Bruised by a sharp fall in the dollar and the bond market as well as a resurgence of computerized stock selling, the stock market Tuesday had its worst day in 3 1/2 months. The Dow Jones industrial average suffered the fifth-largest point drop in its history.

The symbolically important Dow index closed the day with a loss of 51.98, at 2,610.97--a decline of 1.95%. In the final hour of trading on the New York Stock Exchange, the average actually fell more than 67 points before recovering slightly in the last few minutes of the trading day.

Traders and market analysts attributed much of the sharp selloff to the influence of computerized selling programs, which are used mostly by institutional investors who trade millions of dollars worth of stocks and related stock-index futures in tandem.

The computer programs, which generate waves of sell orders directed at a small number of key stocks, have not exerted such a strong influence on daily trading since a 44.15-point drop in the Dow last Jan. 23. But some analysts said Tuesday that the market may be entering a period in which the programs again create tremendous and disconcerting volatility in the stock market. This often occurs when investors begin to hesitate after showing a strong orientation in one direction--in this case, bullish.

"Those who think that program trading has left the market had better think again," said Michael Metz, market strategist for the Oppenheimer & Co. stock brokerage.

In all, 193.45 million shares changed hands on the New York Stock Exchange, with more than 54 million shares turning over in the final hour. Advancing issues led declines about 2 to 1 on the NYSE.

The Dow index's fall was its biggest since May 15, when it dropped 52.97. The largest one-day loss is the 86.61-point decline of Sept. 11, 1986.

Other major stock-market indexes had corresponding declines Tuesday: The New York Stock Exchange composite index fell 3.23 to 181.22; the American Stock Exchange market-value index dropped 1.59 to 359.76, and the NASDAQ over-the-counter composite index slipped 2.47 to 452.50.

Traders said the market had been demonstrating some modest strength for most of the day Tuesday; the Dow industrial index had been up as much as 25 points from Monday's close. But just before 3 p.m., when the Dow was still up about six points, investor sentiment suddenly turned.

That happened when the bond market fell sharply, responding to late weakness in the dollar's valuation against the Japanese yen. The yen was trading in New York at 141.45 to the dollar late Tuesday, compared to Monday's 142.41; the key 30-year U.S. Treasury bond fell $11.25 for each $1,000 in face value. The bond's yield rose to 9.27%, its highest rate of the year, from 9.16% late Monday.

The fall in the bond market rippled through the stock-index futures markets in Chicago, and the drop in prices there kicked in computer programs that instruct brokers to purchase the futures and sell corresponding stocks, a combination that serves to lock in a profit equivalent to the difference in price between the related futures and stocks.

Some analysts said the stock market fall was also exacerbated by a rumor sweeping the floor around 3 p.m. that President Reagan had suffered a heart attack. The White House denied the story and a deputy press secretary said, "The President is fine." Although such rumors are commonplace, they can sometimes serve as catalysts for negative sentiment building throughout the trading floor.

IBM Leads Decline

"If that rumor had hit between May 20 and Aug. 10 (when the market was experiencing a steady surge), people would have shrugged it off," said Eugene Peroni, technical market analyst for the Philadelphia investment firm of Janney Montgomery Scott. "But investor psychology had shifted from confidence to a real questioning of short-term potential."

Contributing to the uncertainty was the market's performance last week, when the Dow index fell 70.15 points in its worst week of the year. Although the index recovered 23.60 points on Monday, analysts said the gain was unconvincing.

Among individual issues, International Business Machines led Tuesday's drop with a collapse of 5 7/8, closing at 162 3/4. Analysts attributed the drop to the market's general downturn as well as to an announcement from Unisys that it will shortly be introducing a line of mid-sized computers designed to compete with products marketed by both IBM and Digital Equipment Corp. DEC itself fell 4 1/2.

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