The Market Story

Return to Article

Flat Day, Ugly Week for Stocks

A. Teymour Golsorkhi

Stocks were little changed Friday but sharply lower for the week, as a relentless rally in oil prices and a parade of warnings in the chip sector halted the market's August-September rally.

The Dow Jones Industrial Average closed higher by 8.34 points, or 0.08%, to 10,047.24, well off the session's high of 10,081; the S&P 500 rose 1.75 points, or 0.16%, to 1110.11, and the Nasdaq declined 6.95 points, or 0.37%, to 1879.48, as oil prices rode a late-day surge to close at a new high.

The Dow finished its worst week since Aug. 2, losing 237.22 points, or 2.3%, while the S&P dropped 1.6%, snapping a six-week winning streak. The Nasdaq also ended 1.6% lower for the week.

Volume was light Friday, with 1.3 billion shares trading on the New York Stock Exchange, as advancers barely beat decliners by 5 to 4; while at the Nasdaq, 1.4 billion shares changed hands, with an advance-decline ratio evenly split.

Oil prices, which eased earlier Friday, reversed course and hit a new high of $48.90 a barrel, before settling at $48.88, up 42 cents for the day in Nymex trading.

Larry Wachtel, senior market analyst at Wachovia Securities, said the release of crude oil from the strategic petroleum reserves doesn't solve the problem, and that's why oil prices rose in the afternoon. "There is just an ongoing momentum in oil. It seems unstoppable now, and that is definitely a detriment to the markets."

But Wachtel believes there's more to the weeklong market pullback than oil. After six weeks of rallying, the markets "were crusing for a bruising. You were going to get around to profit-taking sooner or later, and we got it on Wednesday and Thursday."

In other markets, the 10-year Treasury note was down 1/32 to yield 4.02%. Earlier in the week, the yield fell below 4% for the first time in almost six months. The dollar was up against the yen and down against the euro. Gold was lower.

"I think the action in the bond market next week is going to be scrutinized very carefully," Wachtel said, "and if the yield on the 10-year stays at or below 4% next week, it will be a clear signal from the bond vigilantes that they don't trust the Fed and think the economy is soft."

In the short term, markets will remain sensitive to oil prices, especially as they relate to corporate earnings, said Sobodh Kumar, chief investment strategist at CIBC World Markets. "The manufacturing side needs to pick up," he said. "The focus will be on energy pricing and to what extent that puts a squeeze on margins."

On the economic front, the government said that durable goods orders fell 0.5% for August after rising a revised 1.6% in July. Excluding transportation, durable good orders rose 2.3%, and those results were ahead of analysts' estimates. Analysts had expected a drop of 0.3% in the overall orders.

Also, existing-home sales fell to an annual rate of 6.54 million units in August. The consensus forecast was for a reading of 6.65 million units, vs. 6.72 million a month ago.

"I think the market today is bouncing back from an oversold position, and unless oil prices spike up again, I suspect we're headed for a mixed session heading into the weekend," said Peter Cardillo, chief market analyst at S.W. Bach.

"We've had an increase in earnings warnings so far as opposed to last quarter," said Cardillo, addressing one reason for the pullback in the markets this week. "I admit, the news has been somewhat more negative than I had expected."

On Friday, there were fresh signs of weakness in the chip sector. Philips Electronics (PHG ADR Quote - Cramer on PHG ADR - Stock Picks) on Friday forecast lower-than-expected chip sales in the third quarter, as the Dutch-based conglomerate joined a host of U.S. companies warning of a slowdown. Philips said its chip unit expects sales to be flat compared with the previous quarter on a U.S. dollar basis, but 27% higher than a year ago.

Cirrus Logic (CRUS Quote - Cramer on CRUS - Stock Picks) late Thursday slashed its second-quarter revenue forecast, saying it now expects revenue between $51 million and $52 million. That compares with revenue of $50.1 million in the year-ago period and $59.1 million in the first quarter.

The consensus estimate of analysts is for revenue of $62.3 million, based on a Thomson First Call survey.

Oil sector stocks were under scrutiny Friday as Smith Barney Citigroup downgraded Apache (APA Quote - Cramer on APA - Stock Picks) to a hold from a buy and upgraded Kerr-McGee (KMG Quote - Cramer on KMG - Stock Picks) to a buy.

Elsewhere, ExxonMobil (XOM Quote - Cramer on XOM - Stock Picks) was downgraded to market outperform from an outperform rating by Wachovia.

Elsewhere, shares of PeopleSoft (PSFT Quote - Cramer on PSFT - Stock Picks) rose on heavy volume as word surfaced that the European Commission is expected to approve a $7.7 billion hostile takeover of the company by software rival Oracle (ORCL Quote - Cramer on ORCL - Stock Picks). Shares of PeopleSoft ended up 3.8% to $19.99.

Overseas markets were mostly lower, as London's FTSE 100 finished up 0.2% to 4578.10 and Germany's Xetra DAX added 0.1% at 3890.30. In Asia, Japan's Nikkei dropped 1.1% to 10,895, while Hong Kong's Hang Seng lost 1.6% to 13,067.

Stocks ended mostly lower Thursday amid a spike in oil prices and profit concerns. The 10-year Treasury note hit a six-month low.