Jack Caffrey began his day with a shopping list.
The J.P. Morgan Private Bank equity strategist knew the market would plunge at the opening bell. The war in Iraq, which began smoothly, had turned ugly. The Dow Jones industrial average, coming off its strongest week in two decades, appeared ripe for a fall. The Nasdaq Stock Market seemed even more precarious, with futures trading down significantly before the market opened.
Caffrey and his colleagues, all of whom handle money for wealthy individuals and families, plotted strategy. For long-term investors, they put together the list of stocks they wanted to buy on the dip, chief among them defense contractor Northrop Grumman Corp. Caffrey said he believed that Northrop remained well positioned to take advantage of increased defense spending and that the market had not given the company enough credit for its recent acquisition of TRW Inc. For shorter-term clients, Caffrey and his colleagues picked some shares to sell and lock in profits from last week's rally.
"When the fat pitch is served up, you want to be in position to take advantage of it," Caffrey said this morning as trading opened and the anticipated sell-off rapidly materialized.
Taken together, the trading by Caffrey and four other market players, all with very different investing styles, helps explain the behavior of a wildly volatile stock market, one that can race forward, as it did last week, or plunge 300 points, as it did today, based primarily on war news.
Sujatha R. Avutu, team leader for the $650 million Evergreen Equity Income Fund, got to the office early this morning and mapped out her day. She thought she might sell some American Express Co. shares, which had risen to nearly $38 on Friday. She wanted to take some profit. She also planned to buy Microsoft Corp., impressed with its free cash flow and its recent decision to pay a dividend to investors. But in such a rocky environment, Avutu would make no big moves. "It's just baby steps," she said.
At the morning meeting at T. Rowe Price in Baltimore, head trader Andrew M. Brooks and his troops discussed stocks and sectors that performed particularly well last week and would probably fall back today, possibly presenting buying opportunities late in the day. Walt Disney Co. and General Electric Co. were among the names mentioned. "We will be looking at things throughout the day and asking, 'Do we go ahead, nibble a little bit here?' " Brooks said.
Charles J. Gradante, chief executive at hedge-fund firm Hennessee Group, said he would buy some shares on the dip and then hope to sell into a late-day rally.
Day trader Fane Lozman, meanwhile, planned to go negative all day long by "shorting" the major indexes, essentially placing trading bets that the indexes would fall. "There is just no reason to be bullish," said Lozman, a former Marine aviator, referring to what he described an irrational run-up last week coupled with the gloomy war news.
Avutu, betting that the market would slide pretty much all day, wasted no time. She made her move just after the 9:30 a.m. opening bell at the New York Stock Exchange, selling chunks of American Express. By the end of the day, Avutu and other profit-takers helped make the financial giant the ninth-biggest loser among Dow stocks on the day. Amex fell $1.51 a share, about 4 percent.
Around 10 a.m., Caffrey said Northrop continued to be the only really attractive buy opportunity on his trading screen. So J.P. Morgan Private Bank stepped in and bought some shares in the defense contractor for its private banking clients. Northrop wound up one of the day's few bright spots, rising $2.08 a share, just over 2.5 percent, to $84.43, helping avoid an even bigger market decline.
By early afternoon, the traders at T. Rowe Price remained idle. The Dow had already dropped by more than 200 points, but none of the firm's fund managers were looking to do any buying. The traders even steered clear of the two possible targets they identified earlier in the day, Disney and GE, thinking that both probably had further to fall.
Disney, which owns ABC, and GE, which owns NBC, are expected to have huge costs related to covering the war. Because T. Rowe Price and others like it decided to sit the day out, there were no buyers to cushion the fall in share price for either firm. Disney was the day's biggest Dow loser, dropping 7.2 percent, to $17.40. GE was the 10th-biggest loser among the blue chips, dropping 4.5 percent, to $26.73. Both had been big winners in last week's rally.
At 2 p.m., Lozman, the day trader, decided to pull the plug and cover his short positions. "This market has done what it's going to do," he said. He was right. Perhaps because other sellers thought as Lozman did, the market began a small rally shortly before 2:30 p.m. as some buyers finally emerged.
Gradante was ready. Earlier in the day, his hedge fund picked up shares in Brocade Communications Systems Inc. when they were trading around $4.60. When the stock hit about $4.95 in the afternoon, Gradante sold, making a profit of around 8 percent. He also bought shares in troubled biotechnology firm ImClone Systems Inc. and then sold them when they hit an afternoon high of around $17.50. The action of intra-day traders such as Gradante, who used the afternoon mini-rally to make some quick money, helps explain why the rally petered out, sending all the major indexes to losses of more than 3 percent on the day.
Things could have been worse.
At Evergreen, Avutu pounced on Microsoft, which hit a low for the day of $25.19 around 2 p.m. Other buyers emerged around the same time, giving the software giant a brief boost. But the Gradantes of the world helped snuff out the rally and Microsoft receded once again, closing down 4.8 percent at $25.29, making it the eighth-worst performer among Dow stocks.
At T. Rowe Price, the traders deciding against getting into the action. Brooks disappeared early to go watch his son play baseball.
At J.P. Morgan, Caffrey said that while the big mutual fund did not step in and buy today, it also did not rush to sell after disturbing war news. "Volume was pretty low, and that's a good sign," Caffrey said as he prepared to head home. "There was a big price move, but it wasn't exactly a major sell-off. It was a profit taking. Nobody panicked."