Stocks dive on investor uncertainty

NEW YORK — NEW YORK -- In the biggest sell-off in six months, stock traders knocked prices down from record highs yesterday, with the Dow Jones industrial average plummeting 81.96 points, to 4,340.64.

The plunge was so steep that at 3:34 p.m., when the Dow was off more than 50 points, it set off the New York Stock Exchange "circuit breaker" rules intended to slow high-speed computer-guided trading and calm a volatile market. But the Dow continued to fall another 30 points.


Before yesterday, the Dow had risen more than 15 percent -- or 584 points -- this year.

"A drop like today changes your complacent attitude toward the market," said Thomas Gallagher, head of equity trading for Oppenheimer & Co. "It's a very spooky market when the Dow gets this high."


A few traders cited familiar reasons for the big move, pointing to a disappointing report on the U.S. trade deficit and fears that a decline in borrowing costs was coming to an end. Indeed, bond prices fell and long-term interest rates rose somewhat. The yield on the 30-year Treasury ended at 6.89 percent, up from 6.86 Wednesday.

But there were also indications that after the market's nearly seven-month surge, with the Dow hitting six new highs in a row recently, many traders were simply poised to jump out of stocks and take their profits at the first sign of a pullback.

Adding a large measure of selling pressure is the expiration today of two kinds of stock options, an event known as "double witching," which often leads to a large run-up in trading volume and wide swings in price.

Analysts also say it is normal for stock prices to rise sharply for a period and then to fall as much as one-third to one-half of the advance.

"You have to keep this in statistical perspective," said David Holt, vice president of research and strategy for Wedbush Morgan Securities in Los Angeles. "You have to take today's drop of 82 points and compare it to the almost 750-point rise from Nov. 23, when this latest rally started."

Still, yesterday's decline was the biggest fall in blue-chip stock prices since the fall of more than 91 points on Nov. 22, 1994.

The Dow's 82-point drop was a decline of 1.85 percent. The broader Standard & Poor's 500 dropped 7.49 points, or 1.42 percent, to 519.58, and the Nasdaq composite index fell 7.87 points, or nine-tenths of 1 percent, to 864.06.

But there were some signs of strength in the market, said Alan B. Bond, president of Bond, Procope Capital Management. High-technology stocks like Microsoft, Oracle Systems and Cisco Systems all traded above or near their opening prices until the last half hour, indicating options-related trading.


"What we saw today was that the tech stocks' leadership is not faltering," Mr. Bond said.

The market headed down after the Commerce Department reported that the overall trade deficit narrowed in March, while the deficit with Japan widened.

The narrowing of the overall deficit was less than many analysts had expected, suggesting that the economy is not slowing as much as had been anticipated.

That would also suggest that inflation was still a threat, casting doubt that the Federal Reserve would cut interest rates in the second half of the year.

Also hurting stocks, traders said, were two warnings from industry leaders: Johnson & Johnson, the world's second-largest health-care company, cautioned yesterday that some analysts' profit estimates for 1995 may be high, and AMR Corp. Chairman Robert Crandall said Wednesday that the economy and airline ** industry are close to a peak.

Volume on the New York Stock Exchange was above normal at 352 million shares, about 5 percent above this year's daily average.