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Stocks Follow Rate Cut With Another Gain

April 20, 2001|WALTER HAMILTON | TIMES STAFF WRITER

Technology shares spearheaded another impressive rally on Wall Street on Thursday as the Federal Reserve's interest rate cut and some upbeat earnings stoked the belief that a lasting market recovery is underway.

The Nasdaq composite index soared 102.70 points, or 4.9%, to 2,182.14, while the Dow Jones industrial average gained 77.88 points, or 0.7%, to 10,693.71. Trading volume was again very heavy.

Since bottoming two weeks ago, Nasdaq has jumped a startling 33.2%. That's the second-biggest rally since the index began its record slide 13 months ago.

Coming on the heels of Wednesday's surge, Thursday's gains bolstered the view that stocks in general--and tech in particular--have seen their lows and that the yearlong bear market has ended.

Indeed, the tech rally drained money from other stock sectors Thursday. Drugs and energy, two areas that had been viewed as safe havens during the market's travails, fell as investors shifted assets to tech. Overall, winners topped losers by 16 to 14 on the New York Stock Exchange and by 24 to 15 on Nasdaq.

The market still has many obstacles to overcome, and any advance is likely to be jagged in the coming weeks and months, analysts said.

Still, the back-to-back gains show that many investors believe the Fed's rate cuts, coupled with some recent signs of economic stability, mean the outlook for corporate earnings will improve by the year's end.

The rally "is sustainable and it is real," said John Bollinger, head of Bollinger Capital Management in Manhattan Beach.

Some analysts, however, cautioned that many challenges remain for tech stocks, including high valuations and drastically slashed corporate spending on tech equipment.

Experts say the rally is being partially fed by panicked buying from investors with light tech holdings who suddenly became worried about missing out on the bottom. Though the gains could go on for a few weeks, stocks could fall back again after that, some warn.

"It's Jekyll and Hyde," said Christopher Wolfe, strategist at J.P. Morgan Chase's private bank. "We go from greed to fear and greed to fear and we're back to greed."

Wednesday's Fed rate cut is evidence of how feeble the economy has become, said Thomas McManus, market strategist at Banc of America Securities in New York.

He also is dubious about the rally because so many others are bullish. Historically, few investors recognize market bottoms when they occur, McManus said. They've been shellacked so badly that they usually mistake the turn for just another short-term blip, he said.

"There are far too many folks who are confident in calling this a real bottom for me to agree," McManus said. "This market hasn't grappled with the very real possibility that we slip into recession sometime in the next year."

The fear is that this rally could be a replay of the short-lived bounce in January. Nasdaq jumped sharply that month on hopes that the worst was over, but by February the bear market resumed.

Nevertheless, many investors subscribed Thursday to the time-honored idea that it's unwise to fight the Fed. Historically, stocks have risen strongly following deep rate cuts.

Investors also were encouraged by some continuing upbeat earnings news, especially from the battered tech sector.

IBM, whose shares jumped 7.5% to $114.47, led the way in tech. The computer giant reported late Wednesday that its quarterly earnings were in line with analysts' predictions and that its revenue was better than expected.

Also, Apple Computer shares soared $2.93, or 13%, to $25.72 after the company unveiled better-than-expected earnings late Wednesday. Software firm Oracle rose more than 13%, in part because of an upgrade from brokerage Morgan Stanley.

The market received additional good news after the close Thursday, when Microsoft said its fiscal third-quarter profit had modestly beaten expectations.

The equity rally caused another sharp sell-off in the bond market, with the yield on the benchmark 10-year Treasury security soaring to 5.29% from 5.15% on Wednesday. Four weeks ago the yield was 4.76%.

Bonds are suffering partly because of expectations that the economy will revive, threatening higher inflation, and partly because some investors are selling out to buy stocks. In any case, a sustained rise in bond yields could short-circuit the stock rally, analysts note.

But the biggest challenge for the market in the next few months will be investors' reaction to what could be continued dreary news on earnings and the economy.

It'll take several months for rate cuts to work their way through the economy. In that time, economic reports probably will be mixed and second-quarter earnings overall are almost certain to be very weak, experts say.

If the economy stalls further and investors lose hope for a profit rebound later in the year, stocks could be hit again, some warn.

"Implicit in all this is that stocks can absorb bad news without going down" again, said Charles Blood, chief strategist at Brown Bros. Harriman & Co. Though the rally of the last two weeks has boosted hopes that investors are looking to better times later this year, their patience is sure to be tested this spring and summer, analysts say.

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Market Roundup: C6

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* MARKET RESCUE

Interest rate cut suggests the Fed aimed to boost the stock market. A1

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Nasdaq's Rallies Since the Bear Began

The tech-dominated Nasdaq composite index's rally from its low April 4 has lifted it 33.2% so far. That makes this the second-biggest rally since the index peaked March 10, 2000. A look at the five major Nasdaq rallies of the last year:

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4/24/00 to 5/1/00: +13.7%

5/23/00 to 7/17/00: +35.1%

8/2/00 to 9/1/00: +15.7%

1/2/01 to 1/24/01: +24.8%

4/4/01 to Thursday: +33.2%

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Thursday's close: 2,182.14, up 102.70 or 4.9%

Sources: Times research, Bloomberg News

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