Wall St stocks bounce back from shock


Gold stocks got a boost after forecasts of a price rise for the physical commodity

By Alexandra Twin
CNN/Money Staff Writer

NEW YORK (CNN/Money) -- U.S. stocks staged a tremendous turnaround by the close Wednesday, with major indexes recovering from the steep losses that followed WorldCom's disclosure of what might be the biggest accounting fraud in history.

The Dow Jones industrial average lost 6.71, or 0.07 percent, to stand at 9,120.11, having been down almost 200 points earlier in the session. The Standard & Poor's 500 index dropped 2.61, or 0.27 percent, to close at 973.53.

The Nasdaq composite gained 5.34, or 0.38 percent, to finish at 1,429.33, having been down nearly 50 points earlier in the day.

The composite briefly dipped to lows not seen since June 1997 but recovered by the close to hover just above its post-September 11 lows.

Traders said oversold conditions probably led to a late-day bout of short-covering. Short-covering occurs when traders who have been betting that stocks will continue to fall are forced to buy to cover their positions.

"There weren't really any trading floor rumors, nothing in terms of news. What you saw late afternoon that turned it around was a lot of short covering. So much selling had been done all day that shorts needed to cover," said Troy Nickerson, co-head of Nasdaq trading at Robertson Stephens. "We're also at the end of the quarter and that comes into effect, too."

However, after so much selling, looking forward, the next few days could bring a short-term technical rally, Ted Weisberg, a trader at Seaport Securities, told CNNfn's Street Sweep.

Markets were hit hard earlier in the day after telecom service provider WorldCom (WCOM: Research, Estimates) said late Tuesday that it will have to restate financial results due to billions of dollars improperly accounted for. The company has also fired its chief financial officer and will lay off 17,000 employees.

Trading in WorldCom stock, which closed Tuesday at 83 cents, was halted by the Nasdaq before the markets opened.

The matter drew attention from the highest levels of the U.S. government. President Bush, attending a summit in Calgary, Canada, said Wednesday that the Securities and Exchange Commission and other government entities would investigate WorldCom. The Justice Department told CNN that the WorldCom matter is "under review."

Although largely overshadowed by WorldCom, investors also took in the afternoon news that the Federal Reserve has opted to keep rates unchanged at 1.75 percent, a 40-year low.

Market 'oversold'

The central bank also opted to keep the bias at "neutral," implying that the risk of an economic slowdown and the risk of inflation are evenly balanced. The action was in line with expectations, although the accompanying statement was a little more cautious than in previous months.

In other corporate news, J.P. Morgan (JPM: down $1.44 to $31.49, Research, Estimates) and Citigroup (C: down $2.12 to $37.00, Research, Estimates), both financial firms and Dow components, are being investigated as part of a new inquiry into the role banks played in developing questionable financing deals for energy companies, the Wall Street Journal reported. The deals were adopted by companies such as Enron and Dynegy (DYN: down $0.43 to $6.24, Research, Estimates).

But countering the losses on the Dow were gains in Procter & Gamble (PG: up $2.08 to $91.08, Research, Estimates), Merck (MRK: up $1.28 to $50.33, Research, Estimates) and IBM (IBM: up $1.45 to $70.05, Research, Estimates).

Some analysts also questioned whether the long-elusive "bottom" may nearly be in place.

"The market is getting so oversold and has such a background of negativity that maybe we are finally getting to the point where a bottom could be set," said John Hughes, market analyst at Shields & Co.

Martha Stewart


Investigators are extending their probe into Martha Stewart

In addition, federal investigators have expanded their probe of Martha Stewart's controversial sale of ImClone Systems (IMCL: up $0.13 to $9.08, Research, Estimates) shares, a published report said, putting further pressure on shares of her company, Martha Stewart Living Omnimedia (MSO: down $3.20 to $10.40, Research, Estimates).

Also affecting telecoms was a published report alleging that the Securities and Exchange Commission will be taking a more aggressive stance in its investigation of how Qwest Communications (Q: down $2.40 to $1.79, Research, Estimates) accounted for up to $1.4 billion in sales and whether the company should have recognized the revenue right away.

Memory chipmaker Micron Technology (MU: down $0.75 to $19.00, Research, Estimates) reported a fiscal third-quarter loss Tuesday of 4 cents per share, compared with the profit of 6 cents analysts expected. The company cited the slumping demand from computer makers.

Online discount travel booker Priceline.com (PCLN: down $0.97 to $2.83, Research, Estimates) said sales for its second-quarter will miss expectations due to the absence of the seasonal gain it normally sees in June sales.

Gold bulls

"We're in a bear market. You're going to see these little rallies on short-covering, but there's nothing (else) on the horizon to push us past that right now," said Matt Ruane, director of listed trading at Gerard Klauer Mattison.

On a positive note, gold stocks, already likely to surge as a safe-haven play during times of stock selling, got an extra boost after Merrill Lynch raised its commodity price forecasts for gold, raising its 2002 earnings-per-share estimates on Harmony Gold (HGMCY: down $0.10 to $14.40, Research, Estimates) and Anglogold (AU: down $0.79 to $27.90, Research, Estimates).

But despite the late-day turnaround, "we are going to be under this cloud for a while," said Ram Kolluri, chief investment officer at GlobalValue Investors. "For a long time, people have been so focused on earnings that corporate America realized that they can get away with playing games with the balance sheet, and now it's catching up with them."

Markets got a few positive reports on the economy. New home sales rose 8.1 percent in May to an annual rate of 1.03 million; analysts were expecting only a modest rise to 920,000 from a rate of 915,000 the previous month.

Global toll

In other economic news, the Commerce Department said demand for durable goods made in U.S. factories rose 0.6 percent in May, following a revised 0.4 percent gain in April. Economists were only expecting a gain of 0.5 percent.

In response to the stock selling, Treasuries rose sharply, pushing the yield on the 10-year note down to 4.74 percent.

WorldCom news took its toll on global markets. European bourses fell, while Asian markets closed lower. The dollar fell against the yen and the euro. Light crude oil futures rose 44 cents to $26.76. The price of gold rose 20 cents to $320.80 an ounce.

Market breadth remained negative on heavy volume. On the New York Stock Exchange, decliners beat advancers by more than 10-to-7 as 1.99 billion shares changed hands. On the Nasdaq, losers beat winners by 4-to-3 as nearly 2.04 billion shares traded.