Wall Street finally gets rally — but will it last?

Lisa Singhania

Thursday, July 25, 2002 | 9:57 a.m.

NEW YORK -- After weeks of selling, bruised investors finally have something to cheer about: a 488.95-point gain on the Dow Jones industrial average, its second-biggest point advance ever.

The market fluctuated today -- to be expected in a market that cashed in even the smallest of gains during more than nine weeks of declines. And more accounting questions -- this time at AOL Time Warner -- were a reminder that the issues that fed the protracted slump haven't been resolved.

"I'm excited, but with all the bad news that's happened lately, you can't help but remain a little cautious," said Brian Flynn, a 33-year-old investor from New York whose portfolio includes AOL Time Warner shares. "To hear what's happening with AOL is disheartening, but not surprising."

In a conference call after the market closed Wednesday, AOL Time Warner said the Securities and Exchange Commission was looking at its accounting. Although no charges have been filed and the company denied any wrongdoing, analysts said that in the aftermath of debacles at Enron Corp., WorldCom Inc. and Adelphia to name a few, just the mere suggestion of impropriety might be enough to give investors second thoughts.

"Whenever you start having questions about earnings, about the quality of a company's books, you introduce uncertainty," said Marc Lipson, a finance professor at the Terry College of Business at the University of Georgia. "And that's how you get volatility."

Today's session was expected to come under pressure as investors sold stocks to lock in profits from the big advance that gave the Dow a 6 percent lift, to 8,191.29.

Broader stock indicators also made solid progress. The Nasdaq composite index a 5 percent increase to 1,290.23, while the Standard & Poor's index rose nearly 6 percent to 843.43. Trading volume was heavy; the New York Stock Exchange had its busiest session ever.

The broad rally began on news of the arrests of top Adelphia Communications Corp. executives for allegedly looting the cable TV company. An agreement between House and Senate negotiators on legislation to crack down on corporate fraud further fueled the gains. To investors fed up with unending scandals and arrests, news that concrete action was being taken couldn't have come at a better time.

"The market has been waiting for this," Alan Ackerman, vice president at Fahnestock & Co., said of the Adelphia arrests. "We have a big turnaround in process, but whether it will last or not is a big question."

In morning trading today, the Dow was up 41 points at the 8,232 level, while the Nasdaq was down 10 at the 1,259 level and the S&P was up 5 at the 848 level. But the gain were far from solid; prices fluctuated from the opening.

Indeed, even before trading began today, observers were dubious about the sustainability of the rebound, noting stocks have rallied before and then pulled back. Most recently, the Dow soared 324 points on July 5, only to fall so sharply that within two weeks the average was below 8,000 for the first time in nearly four years. The Nasdaq and S&P had fallen to levels last seen five years ago.

"I'm a little skeptical," said Todd Clark, head of listed equity trading at Wells Fargo Securities. "Every time we've had one of these violent rallies, it's been a classic bear market bounce with no follow-through."

But market watchers do expect some buying. Lipson, the University of Georgia professor, said some investors will buy because the prices of some stocks have dropped so much they no longer seem as risky.

Earnings also appear to be improving -- a further reassurance to investors that the stocks they buy now should eventually pay off. Still, any improvement is likely to come gradually.

"There are probably going to be some people selling (today) because they feel the need to get out, and trading will be volatile," Lipson said. "But I think other people are starting to look at some companies and say they have good prospects and the prices are low."