On Friday, March 21, frantic late trading sent the Dow Jones industrial average tumbling 26 points in the 30 minutes before the closing bell, for a total decline of more than 35 points on the day. Yet, of the 2,066 issues traded, 925 closed higher and 421 were unchanged, against only 720 declines. And 217 different issues hit new high marks, against only seven new lows.
By the following Thursday, the Dow Jones index had recovered all losses, setting a new high in very active trading.
What is going on here?
And how come the stock market has zoomed by a spectacular 500 points since the beginning of the year, a period in which the real economy has been sagging, American-made auto sales are plunging, and the experts seem unsure whether there will be a significant recovery?
The answer to the first puzzle -- an occasional sharp drop in the Dow even when more stocks are advancing than declining -- seems to be this: once every three months, large institutional investors dealing in stock index futures, index options and individual stock options have the chance to swap their holdings to take advantage of price discrepancies that smaller stockowners can't benefit from.
That's computer-aided arbitrage on a grand scale -- the sale of one bundle of securities at a slight, but assured, margin of profit over the purchase of another bundle. To make what is called "program trading" pay off, experts indicate, requires an investment of at least $15 million and often more.
The result -- which critics think comes close to market manipulation -- is often wild gyrations in stock prices not only on the four "Expiration Fridays" when futures contracts expire, but in the final few minutes of trading on many other occasions.
"The real effect on the market hasn't been appreciated because in general, share prices have been going up," said one market-watcher. "But eventually, stock prices will go down, and then the public will take a reaming."
So far, however, the Securities and Exchange Commission hasn't concluded that program trading violates any regulations.
One of the innovators of program trading -- sometimes called "index arbitrage" -- rejects the notion that there is anything wrong with the system. As he sees it, sophisticated traders see legal opportunities, and take advantage of them. Eventually, he thinks that the wild gyrations in stock prices will settle down.
But he concedes that what has been going on makes it hazardous for the individual investor, for whom the stock market has become more and more of a crap-shoot.
"If the little guy wants to play in the market, it's up to him," he said. "But he has to understand the potential dangers and traps. It's getting to be a sophisticated world, in which the management of equities goes far beyond just picking a stock."
His advice to those who want to own stocks: Have your money managed professionally.
The disparity between the Dow Jones index and the rest of the market on Friday, March 21, came about because the strategies followed by large investors who play with millions of bucks through their computers were concentrated on a particular basket of stocks (the XMI contract traded on the Chicago Mercantile Exchange) that mimics the Dow Jones index.
Thus, when the Dow Jones went down 35.68 points last Friday, that represented a decline of about 2 percent. But the New York Stock Exchange index, covering all stocks traded, was off less than 1 percent, and the Standard and Poor's index was off only 1.35 percent.
At other times, the game is played with different "baskets" of stocks.
It's no game for an amateur. But it does mean that anyone interested in the stock market -- and who isn't? -- must begin to look more closely at the available numbers.
White House chief of staff Donald T. Regan, an old Wall Street hand himself, said this week in an interview, "I'm beginning to look beyond the Dow Jones averages" to get a feel for what's going on.
"I no longer follow Dow Jones," Regan said. "I think we've seen a change here due to the options and futures, and these massive computer programs. I think we have to follow the broader Standard and Poor's and the Wilshire 5000 indexes. We have to look at a bigger universe than Dow Jones in order to see the true condition of the market."
Although many observers have watched the steady climb of stock prices since the beginning of the year with considerable apprehension, wondering if and when the market might tumble, Regan is still bullish on stocks and the economy.
He puts aside the notion that the market might be heading for a 1929-style bust: "I don't see the misuse of credit today, and I don't see over-speculation in this market."
As to the seeming contradiction between a booming market and a shaky economy, Regan's explanation -- which matches that of most professionals -- is that the market is anticipating a very good recovery because interest rates and oil prices have plunged.
Oil prices, heading toward the $10 per barrel mark (down from $30 last fall) have forced a reduction in gasoline prices to well under $1 a gallon at the pump, putting billions of additional spending power in consumers' hands.
Largely because of the oil slide, consumer prices dropped 0.4 percent in February, the best decline in more than 32 years. Mortgage interest rates, dipping under 10 percent, are fueling a new housing and real estate boom. The administration thus has been able to cling to its earlier, over-optimistic guess of a 4 percent real growth rate, fourth quarter over fourth quarter. Now, it might pan out.
Meanwhile, the declining dollar has given new life to the American exporting industry, raising hopes that if the huge trade deficit doesn't actually go down, at least it may have peaked. These are the factors that the stock market is betting on.
"Obviously, if we don't get that improved economy, the stock market will be disappointed, and you could see a real correction," Regan said. "I think that markets, like trees, don't grow straight to the sky. You will have pauses in this market, even though I think the long-range outlook is still on the upside. There are bound to be interim corrections. It would fly in the face of history if we didn't have any."