Friday: Stocks Drop Off a Cliff with Bonds, but Bounce Back

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By John J. Edwards III
Staff Reporter

Stocks parted company with bonds late this afternoon to follow a new leader, recovering almost all of their losses behind a surge in futures.

Bonds had a terrible session off a slew of strong economic reports, with the yield on the bellwether 30-year bond skyrocketing to 6.46% from yesterday's close of 6.31%. (See today's

Key Numbers for more on the fixed-income side.) The bond collapse sent stocks reeling, with the

Dow Jones Industrial Average

falling almost 120 points from yesterday's close at one point.

But the closely watched September contract on the

S&P 500

futures started a convincing recovery in midafternoon, bouncing back from an intraday low of 941.50 to close at 953.00, down 5 from the open. At least one analyst spotted the recovery as it began. "Since this bull run began 32 months ago, in December 1994, the S&P futures have never closed down over 5 points on the first trading day of the month," Jerry Hegarty wrote in a 2:30 p.m. EDT edition of

Hegarty's Options Navigator

, a

Thomson Research

publication. "I look for the market to recover some of its losses late today."

That it did. Besides the Dow, the cash S&P 500 rebounded from an intraday loss of more than 15 to close down 7.15 at 947.14. The tech-heavy

Nasdaq Composite Index

actually managed to end on the plus side, inching up 0.52 to a record 1594.33. For the week, the Dow was up 80.60, or 1.0%, the S&P was up 8.35, or 0.9%, and the Nasdaq was up 24.75, or 1.6%.

Market internals remained negative but came off their worst levels of the session.

New York Stock Exchange

decliners led advancers by 1,827 to 1,042 on volume of 515.8 million shares. On the Nasdaq, 2,271 decliners bested 2,005 advancers on 592.6 million.

Joseph Battipaglia, chairman of investment policy at

Gruntal

, said the selloff sparked by robust jobs data and rosy consumer sentiment was a bit overdone intraday. "The growth in jobs is not inflationary," he said. "If we haven't figured that out, we're pretty dim." Still, he said, the slide was by no means a catastrophe even if the losses had stayed at their worst.

"You're going to see, somewhere along the line, a 3 to 5 to 7 to 10 percent correction," Battipaglia said. "Along the lines of what we saw in March-April of this year and July of last year. That's healthy, I think that's good." The fundamentals that have underpinned this market upswing remain in place, meaning any downturns will be fast, furious and quickly forgotten, he said.

So where do we go from here? Battipaglia said it's harder and harder to keep venturing guesses. "Every one of my ranges has been violated this year," he said. But he offered that the Dow can reach 8500 in this quarter or the next, given continued strength in the bond market. If the long-bond yield dips below 6%, the Dow can hit 9000, Battipaglia said. "Ten thousand? Why not next year?" he said. "It's only 10% from 9000, so no big deal."

Friday's market action

(earnings estimates from

First Call

):

Agouron Pharmaceuticals

(AGPH)

, fresh from a blowout fourth-quarter earnings report late

yesterday, fell 2 3/8 to 95 3/8 today on taxation concerns.

Alex. Brown

downgraded the stock to buy from strong buy, and both

Morgan Stanley Dean Witter

and

PaineWebber

cut earnings estimates for fiscal 1998 and 1999. (

TheStreet.com

examined Agouron's profit prospects and the resulting tax woes in a

story today.)

Kellogg

(K) - Get Report

crackled up 5 9/16 to an all-time high of 97 7/16 after reporting second-quarter earnings of 83 cents per share, a dime better than the 16-analyst consensus estimate and up from the year-ago 45 cents. The cereal giant also split its stock 2-for-1 and raised its dividend.

As would be expected in a crummy bond atmosphere, financial stocks mainly suffered today.

J.P. Morgan

(JPM) - Get Report

lost 1 3/8 to 114 1/2,

BankAmerica

(BAC) - Get Report

lost 1 3/8 to 74 1/8,

Chase

(CMB)

lost 1 1/4 to 112 5/16. But

Salomon

(SB) - Get Report

added 1 3/8 to an all-time high of 65 3/8 on a

Business Week

report (discussed in today's

Midday Musings) that the brokerage-industry laggard may be a takeover candidate.

Fore Systems

(FORE)

took another wallop today, losing some of the gains its stock earned in the last two days after executives told Wall Street to disregard the only cheering news it's seen in months. Early Wednesday,

Reuters

reported that Fore's revenue from Asia would double this fiscal year, and that it comprised 20% to 25% of overall business. By Thursday's close, shares of Fore had advanced 2 to 16 1/16. But late Thursday, Fore said Asia represents only 4% of revenue, and today the stock slipped 1/4 to 15 15/16 on heavy volume. The chatter continues -- late on Friday

Reuters

reported heavy purchasing of calls on Fore. Takeover rumors have circulated for some time.

General Dynamics

(GD) - Get Report

clanked down 4 3/8 to 84 1/8 after

Merrill Lynch

downgraded the stock on price to near-term neutral from accumulate and to long-term accumulate from buy.

Kenneth Cole Productions

(KCP)

plummeted 2 3/4, or 18%, to a 52-week low of 12 1/2 after reporting second-quarter earnings of 6 cents per share, far short of the seven-analyst estimate of 21 cents and the year-ago 20 cents. Morgan Stanley downgraded the shoe company to neutral from strong buy. Fellow shoe outfit

Nine West

(NIN)

lost 1 3/16 to 38 7/8.

Intelligroup

(ITIG)

exploded up 5 3/8, or 48.9%, to 16 1/2 after reporting second-quarter earnings of 11 cents per share, a penny better than the two-analyst outlook and up from the year-ago 2 cents.

CDW Computer Centers

(CDWC)

shot up 8 7/8 to 73 1/16 after reporting second-quarter earnings of 59 cents per share, 9 cents ahead of the four-analyst view and up from the year-ago 39 cents.

Interactive Group

(INTE)

jetted up 2 3/4, or 38.6%, to an all-time high of 10 on the news late yesterday that

DataWorks

(DWRX)

agreed to buy the company for $57 million. DataWorks gave up 1 3/8 to 13 1/8.

Fila Holding

(FLH)

rose 1 to a 52-week high of 25 7/8 after

Donaldson Lufkin & Jenrette

upgraded the stock to buy from market perform. True North yesterday agreed to buy

Bozell Jacobs Kenyon & Eckhardt

for $440 million.

General Re

(GRN) - Get Report

fell 4 1/2 to 204 despite reporting late yesterday second-quarter earnings 4 cents ahead of expectations.

3Dlabs

(TDDDF)

bounced 2 3/4 to 32 5/8 after

Robertson Stephens

upgraded the stock to buy from attractive.

Mercury Interactive

(MERQ)

declined 1 5/8 to 16 1/8 after reporting second-quarter earnings of 13 cents per share, in line with the eight-analyst expectation and up from the year-ago 5 cents.

Ambac Financial

(ABK)

slid 2 7/8 to 82 5/16 despite reporting second-quarter operating earnings of $1.53 per share, 4 cents better than the nine-analyst forecast and up from the year-earlier $1.01.

Applied Graphics

(AGTX)

dropped 1 3/4 to 37 1/4 after reporting second-quarter earnings of 21 cents per share, in line with the three-analyst estimate and up from the year-ago 10 cents.

Staff reporter Kevin Petrie contributed to this story

.