Markets Show Resilience on Rough Day

After early losses on tragic news, stocks bounced back, helped by the bond market's closure.
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SAN FRANCISCO -- If the market was "due" for a setback, as technical analysts

forecast on Friday, today's tragic events provided a ready excuse. Yet in the market's latest demonstration of its remarkable resilience, stocks rebounded sharply from early losses incurred in the wake of news of the crash of American Airlines Flight 587.

Once as low as 9408.58, the

Dow Jones Industrial Average

recovered to close down 0.6% at 9554.37, while the

S&P 500

finished down 0.2% to 1118.33, from its intraday low of 1098.43. The

Nasdaq Composite

finished higher by 0.6% to 1840.13 after trading as low as 1782.48.

A growing sense that the crash of Flight 587 was due to mechanical problems rather than terrorists certainly contributed to the market's recovery, traders said. So, too, did better-than-expected guidance from

Ciena

(CIEN) - Get Report

, which rose 9.6%. Other networking and related stocks also advanced, contributing to the Nasdaq's outperformance.

Also, the bond market was closed in observance of Veterans Day, and this helped stocks today, even if it contributed to some of the early morning volatility. The "flight to safety" trade into Treasuries wasn't available, and many equity market participants were probably absent today because of the quasi-holiday atmosphere. (Gold prices bounced amid the uncertainty that followed word of the crash. But after trading as high as $282.50 per ounce, gold finished up 0.3% at $278.60.)

At 991 million shares, volume on the

New York Stock Exchange

was down 16% from its average of 1.18 billion on the seven previous Mondays since Sept. 21. In over-the-counter trading, 1.56 billion shares were exchanged vs. an average of 1.66 on the seven prior Mondays.

"You didn't have the flight to bonds you probably would have gotten, at least early on," said Anthony Cecin, manager of Nasdaq trading at U.S. Bancorp Piper Jaffray in Minneapolis. "Maybe that happens tomorrow, but if they do that it'd be OK. The more

the market climbs the wall of worry, the more money lining up to get back in when it comes back down."

A more fundamental reason for the market's performance today is that "no question, it is in an uptrend," even if it's not likely to be a V-shaped one, Cecin contended. "A lot of people still don't believe it, and are looking for

major averages to retrace the lows. But it's not going to happen unless it's event-driven."

Today's developments certainly showed the market's sensitivity to what were once called "exogenous events" but now are all too familiar and local. Those risks notwithstanding, the market is concentrating on the second half of 2002 and hoping that the economy and earnings will recover by then. Investors have come to believe that inventories, outside of telecom, have either been worked down or written off, and hints of improvement from tech giants such as Ciena today and

Cisco

(CIEN) - Get Report

last week have further fueled optimism, he continued.

Investors are "putting all their marbles on that bet" of a second-half 2002 turnaround, the trader said. "In the last month or so we've seen net covering by hedge funds and net buying by mutual funds. That's why the market is up."

Another source noted that most mutual funds began a new fiscal year Nov. 1 and are afraid of getting behind the market at the start of a new fiscal year.

By the end of October, mutual funds had completed a classic "puke at the bottom" of all their tech positions, said the source, who requested anonymity. "It's a counterintuitive way to manage money, but they held all the way down

and are now buying 'em back because it looks like the easiest money."

Unless you believe in a 10-year Japan-style deflationary cycle, the bond market is likely near the end of its rally, and "you can't keep money on the sidelines forever," the source continued.

Still, a cynical observer (

who, me?

) might note that the recovery scenario has been pushed back from the second half of 2001 to the first half of 2002 and now to the second half of next year. Certainly, other market participants don't share Cecin's enthusiasm.

"Guys running huge money are dollar-neutral because holding overnight unhedged is tough to do," said Sam Ginzburg, senior managing director of equity trading at Gruntal. For example, he mused, equity futures likely would open down sharply tomorrow if some terrorist organization claims credit for today's disaster, even if it wasn't responsible.

"It's crazy times," the trader said, noting that many participants believe major averages are "going to retest over time."

That said, he -- like so many others -- was duly impressed with the market's resilience today, and it was hard to feel otherwise.