Heartened by a sharp turnaround in the bond market prompted by Federal Reserve action and a stronger dollar, stock prices shot higher Tuesday with the Dow Jones industrial average posting its second biggest point gain ever.
Technology issues and other blue chips led the rally as investors who had bet on a declining market through ”short sales” rushed to reverse course in the final hour of trading in what one analyst described as ”a feeding frenzy.”
The Dow bounded up 66.47 points to close at 2337.07, just 1/2 points shy of the all-time daily gain on April 3.
”The real key (to the stock market) was the turnaround in the bond market,” said Michael Metz, senior vice president and investment strategist for Oppenheimer & Co. ”The Fed intervened late in the morning. We don`t know how much, but the signal is if they`ve snugged (tightened), they feel they`ve snugged enough.”
The stock market responded to the big rally in the bond markets, said E. Craig Coates Jr., managing director of the government bond department for Salomon Brothers Inc. ”To look at it in perspective,” he added, ”the government bond market has dropped 15 percent in value since late March. It`s enormously oversold.”
The broader market of New York Stock Exchange-listed issues also rose, but less dramatically than the Dow. Gainers outpaced losers by about 3 to 2.
Volume on the Big Board came to 191.34 million shares, up from 139.07 million Monday.
At the American Stock Exchange, the market value index rose 0.52 to 328.96. The Nasdaq composite index for the over-the-counter market closed at 418.56, up 0.83.
The dollar experienced a late-day run-up, as well, recouping losses registered in the morning after it fell below 142 yen despite intervention by the central banks of Japan, Switzerland and West Germany.
Commodity prices also stabilized, encouraging investors. Both a lower dollar and higher commodities prices tend to stir up inflation fears.
A series of positive reports by corporations on their first-quarter earnings helped fuel the surge in stock prices once the direction was reversed.
Monte Gordon, director of research for Dreyfus Corp., said a key psychological turning point was when the futures market for bonds hit a five- year low but managed to rebound. A decline in bond prices means investors expect interest rates to go higher, another indicator of higher inflation.
”Some of the worst fears they had created seemed hollow,” Gordon said.
”It was more of a technical nature than fundamental.”
When computerized trading programs kicked in after the reversal in the Dow`s fortunes, buyers on the sidelines ”had a feeding frenzy comparable to what the sharks do.”
Gordon said he remained optimistic but cautioned, ”You have to assume the problems have not gone away simply because the bond market rallied and the dollar went up.”
The day began in a strongly negative atmosphere, with bond prices taking a severe beating and interest rates jumping higher amid escalating worries over the dollar`s weakness and prospects for accelerating inflation.
Bond prices move in the opposite direction from interest rates. By midmorning, the bellwether 30-year Treasury issue was down 1 3/4 points, or $17.50 per $1,000 in face value, its yield at 8.56 percent, up from 8.39 percent late Monday.
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But gradually the dollar began to strengthen. This boosted bond prices and bond futures, encouraging both bond and stock traders that the morning`s early slide apparently was not going to turn into a rout.
”It had an opportunity to drop another 20 points–but it didn`t,” said Dennis Jarrett, a technical analysts at the Kidder, Peabody & Co. securities firm.
That fact alone encouraged traders to look for greater gains. It also contributed to a basic turnaround in the market`s psychology–a change also prodded by some strong earnings reports, analysts said.
By mid-day, the momentum had shifted from negative to neutral, heading in a positive direction that continued to build, fueled by technology stocks and some blue chips.
”Today, Prime Computer helped set it off, even though it is a small company,” said Jerry Simmons, a block trader at the Smith Barney, Harris Upham & Co. Inc. securities firm. ”General Motors, too. There were rumblings about better-than-expected earnings,” he said.
General Motors was up $3.37 at $89.12.
On the NYSE`s list of most-active issues, Prime Computer was up $1.75 at $26.50, International Business Machines was up $7 at $157, Honeywell was up $2.62 at $78.62 and Digital Equipment was up $8.37 at $167.87.
Texaco led the Big Board`s most-active list at $31, up 75 cents, while Exxon was up $2.25 at $89.87.
Sears Roebuck rose $2, to $53.37; J.C. Penney was up $1.50 at $97.75.