Recipe for Dow Mania

SAN FRANCISCO -- It's a mad, mad, mad, mad world on Wall Street these days. The proverbial "big W" -- why the


rose nearly 500 points

Thursday while the


climbed 135 after falling 127 early on -- remains as prominent as was

Jimmy Durante's

schnoz. Thus, it is the focus of this column.

Before we get down to brass tacks, let's call a cliche a cliche: This action is unprecedented, and not just because the Dow enjoyed its biggest point gain ever.

Conversations with various market players leave one (me) feeling that even seasoned pros are struggling to cope with the previously unthinkable volatility. More perplexing, that volatility is now infecting once "stable" stocks such as


(MRK) - Get Report

, which rose 8.7% Thursday.

"I don't think anymore, I just react," quipped one veteran market watcher. "There's no point in trying to forecast it. The volatility has gotten so high -- any of the stocks anybody would like to own typically have 10% daily ranges. What the hell are you supposed to do with that?"

With that backdrop, join me as I try to dissect this most convention-busting market.

The Elephant in the Room

For the Dow and

S&P 500

to rise with such rigor in such a short time frame, market players agree, there


have been a major asset reallocation by the huge mutual fund families such as





Unfortunately, the Fidelities of the world don't broadcast their trades, so any evidence is anecdotal.

Harry Milling, markets analyst at


, laments that even that firm -- whose

raison d'etre

is to track mutual funds -- isn't privy to the day-to-day (or even week-to-week) allocation decisions of major institutions.

But "certainly there has been a shift into the Dow," Milling said. Less obvious is his observation that "this is not a shift away from the Nasdaq," but rather an attempt by fund managers to correct the fact they were "grossly underweight" blue-chip stocks.

Milling compared the action to when many U.S.-based investors began shifting their attention toward Japan last year -- not at the expense of domestic holdings but to try to bring their portfolios closer to equilibrium.

Then again, Thomas McManus, equity portfolio strategist at

Banc of America Securities

, noted that trading volumes -- while robust -- haven't been egregiously so this week. The 50-day moving average for

New York Stock Exchange

volume is 1.1 billion shares. Thursday, a record 1.48 billion shares traded, suggesting that while the action is unusually brisk, there's not necessarily a "huge rebalancing" going on.

That said, the longtime tech bull believes this move is "completely different" than the minirevival value stocks enjoyed in 1999. That's because while last year's short-lived value advance was almost exclusively a cyclical story, this recent run has incorporated nearly every sector that had suffered this year.

Heading into this week, only three of the 11 S&P industry groups were up for the year, he said -- utilities, technology and health care. All the rest were down, save energy, which was flat.

"The market got caught leaning the wrong way -- overvaluing the tech group and undervaluing everything else," McManus said.

Like many, he views last week's

Procter & Gamble

(PG) - Get Report

debacle as the "last shoe to drop" for the blue-chip stocks, calling the "magnitude" of the reaction "way over the top" in terms of what was justified. "Those are the kind of signs you get at extremes."

McManus declined to discuss which stocks he believes will benefit from the changing trend, but John Bollinger, president of


, did.

Blue-chips will continue to perform well because many "got knocked down to extremely attractive levels," while small-cap growth remains the top choice for investors who can venture down the market-cap scale, Bollinger said.

But the answer isn't necessarily tech. He offered

Modem Media Poppe Tyson



TST Recommends


(CTAS) - Get Report

, and



as "different stories from different areas and themes" that are promising.

The money management arm of Bollinger's firm is long all three.

Good Witch or a Bad Witch?

Wednesday, I dealt with the potential influence of Friday's triple-witching expiration, so I'll be brief here. But clearly it's on the minds of market pundits.

Still, "we have to be careful -- always -- in reading too much into any kind of a huge move in an expiration week," McManus said. "We could be looking at the bet someone is making rather than the fact the bet is correct."

Brother Can You Spare $50K?

As you may have

already heard, margin activity climbed 8.9%, to a record $265.2 billion in February, following a 6.5% rise in January.

Charles Biderman, publisher of

, noted the Nasdaq's move down to begin the week coincided with a decision by

Datek Online Brokerage

to raise margin requirements on many "highfliers" or make them margin-restricted (


) altogether.

A Datek spokesman confirmed the firm "toughened" margin requirements on 78 stocks this week, as reported by

The Wall Street Journal

. He declined to provide a list of the stocks affected.

Biderman said other online brokers have enacted similar changes in recent days, although sources at

TD Waterhouse


National Discount Brokerages

, for example, denied having done so.

Charles Schwab

did not respond to a request for similar comment.

Still, the

Federal Reserve's

tactic of "targeting the highfliers by jawboning" the NYSE and

National Association of Securities Dealers

regarding margins is working, Biderman argued.

At the same time, there's been more than $18 billion in cash takeovers of public companies in the past two weeks and $16 billion in stock buybacks, he said.

So while momentum favorites are suffering from liquidity problems, "there's money flowing into the checking accounts of market pros" because of the buybacks and leveraged buyouts. That money is finding its way into Dow and S&P-type stocks and then, because of "herd followers," everybody is now on the "new bandwagon," Biderman continued.

In other words -- momentum traders go where the momentum is and aren't necessarily wed to tech.

The Fed & the Fundamentals

To some, everything beyond the macro fundamentals of the economy and interest rates is just noise. (To others, all of this is.)

This week's blue-chip revival has come amid a growing sense the Fed will raise interest rates by 25 basis points at its next two meetings -- March 21 and May 16 -- but will refrain from additional tightening because while the economy remains strong, inflation is quiescent.

But "there's not going to be an end of tightening if stocks keep going on like this," said Donald Fine, chief market analyst at

Chase Asset Management

. "This is not going to hinder future consumer spending."

Additionally, recent economic data -- including today's

Producer Price Index

, housing starts, jobless claims, and

Philadelphia Fed

survey -- "are all indicating a rip-roaring economy" and thus belie the view the Fed soon will leave the stock market to its own devices, Fine said.

"Something doesn't fit," Fine continued. "If the stock market keeps behaving like this, something is going to have to give."



that goes beyond the pale of "normal" in what is already a remarkable market is going on. Anyone claiming to be able to sum it all up in a tidy package is either lying or a better (wo)man than I,

Gunga Din.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at .