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Dow's Point Fade Points Up a Bigger Question

Markets: Blue chips give up early hefty gain to end moderately higher--prompting analysts to ask, how much weakness will investors tolerate?


In a sign that the stock market's two-week rally is losing steam, the Dow Jones industrial average gave up a big early-day gain Tuesday to end with only a moderate advance.

The Dow climbed 39.40 points, or 0.5%, to 8,505.85, its fifth straight winning day. But the Dow faded in the final 2 1/2 hours after being up as many as 186 points. The broader Standard & Poor's 500-stock index and the technology-heavy Nasdaq composite also lost early gains. The S&P ended up slightly, while the Nasdaq lost 9.54 points, or 0.6%, to 1,639.19.

After rising a whopping 16% in nine sessions, many analysts expected the Dow to weaken. The key from here, experts say, is to interpret how investors react if stocks continue to back off in coming days.

"The real test will be how far do you pull back and how deep will that decline be?" said John Hughes, a technical analyst at Shields & Co., a New York investment firm.

If any sell-off is light, that could point up strong underlying demand. But a harder fall would illustrate that investors remain poised to exit at the first sign of trouble.

To technicians, who study the price and volume patterns of stocks, the market made significant progress recently. Specifically, stocks two weeks ago successfully "retested" the lows they reached early in September.

That means the major indexes fell back to their earlier troughs but did not dip noticeably below those levels.

"We already did a lot of the dirty work on the rally," said Elaine Yager, a technical analyst at Herzog, Heine, Geduld Inc. in New York. "It was not unnatural by any stretch of the imagination to roll over on profit-taking."

On the negative side, however, the market rose fast quickly. For a sustained advance to occur, technicians say, the market must move sideways for a period--a process known as backing and filling--rather than head straight up.

"The way it came up so sharply here shows the market can't continue at this rate," said Philip Rettew, a senior market analyst at Merrill Lynch & Co.

The major averages are now running into what is known as resistance. These are levels at which investors are likely to sell. For example, the Dow and S&P both rose above their 200-day moving averages early Tuesday--a key indicator--but fell back below those levels by day's end. The Nasdaq pierced its 50-day line, then slumped back.

The Dow now is 8.9% off its peak, the S&P 10.3% and the Russell 2,000 index of small stocks off 27%.

In a piece of good news for stocks, software giant Microsoft said after the market closed that its fiscal first-quarter profit climbed 58% to $1.52 billion, or 56 cents a share. That's up from 36 cents a year earlier and topped analyst estimates by 7 cents. Shares of Microsoft, which is battling antitrust regulators in court, fell $2.69 to $100.25.

IBM also beat analyst predictions with third-quarter profit that rose 10%, driven by a strong showing by its services business. However, the world's biggest computer maker issued a cautious forecast, warning of continued weakness in Asia and Latin America. IBM closed down $1.50 at $137.88.

For the fourth time in five days, the Russell led the S&P. It gained 1.7%, bringing its five-day advance to 11.9%.

On the New York Stock Exchange, 958.3 million shares were traded, the sixth-busiest day ever.

Bond yields rose as stocks advanced and concerns lightened that the U.S. economy will fall into recession. The yield on the 30-year Treasury bond climbed to 5.07% from 4.98% on Monday.

Some analysts believe the recent advance is nothing more than a "bear trap" in which a seemingly strong rally lures investors but is followed by another leg down. The danger is that investors who bought at the lows two weeks ago may be quick to sell to lock in gains.

"Frankly, I'm a seller on the first down day this week," said John R. McGinley Jr., a technical analyst who publishes the Technical Trends newsletter from Wilton, Conn.

Some traders say they see signs that big investors are unloading stocks gradually as the market climbs.

"People are taking advantage of the move up in price in the past week and a half," said Dan Afflitto, a trader at Cantor Fitzgerald, a New York investment firm.

The market has formed what's known as a "double bottom," in which the major indexes fall to lows, rally, but then fall again to those levels or just below them. The reasoning behind that indicator is that investors who hung on through the first drop get scared out in the second fall. That leaves only investors who refuse to sell. And with no more sellers, the stocks in the index are poised to move higher.

Among Tuesday's highlights:

* Bank stocks surged on enthusiasm about earnings. Chase Manhattan, the nation's second-largest banking company, said its third-quarter profit was better than expected. Its shares rose $1.81 to $53.06, even though profit fell.

Wells Fargo, which is being acquired by Norwest, said third-quarter earnings rose 20%, thanks to a solid U.S. economy and reduced costs. Its shares moved up $11.06 to $378.56.

Overseas, stocks in Japan and on major European exchanges gained. And in today's early trading, Tokyo's Nikkei index surged 3.4%.

Market Roundup, C10


Quick Turnaround

The Standard & Poor's 500-stock index has surged back strongly from its intraday low on Oct. 8. However, some analysts say the rebound, which has caused the S&P's chart to resemble a "V" formation, has occurred too rapidly and may give way to profit taking in the next several days. Daily closes and latest:

Standard & Poor's 500 index, daily close--Oct. Tuesday: 1,063.93

New York Stock Exchange volume, in billions--Oct. Tuesday: 958.3 million

Source: Bloomberg News

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