Muted Reaction to Good Economic News

Following some early drama, major averages were waffling around the break-even point at midday on Wall Street.

As of 2:30 p.m. EDT, the Dow Jones Industrial Average was down 0.1% to 9674.06, the S&P 500 was down 0.03% to 1035.83 and the Nasdaq Composite Index was down 0.3% to 1548.4.

Equities' inability to build on yesterday's big gains was particularly frustrating to bulls because the day's economic news was supportive. The Labor Department said the consumer price index was reported to be flat in May vs. April's 0.5% jump and expectations for a 0.1% rise. Core CPI, which excludes food and energy, rose 0.2%, in line with expectations.

Also, the Census Bureau reported housing starts increased by 11.6% to 1.73 million in May, reversing a 13% decline in March and April, and beyond estimates for 1.6 million units. Single-family starts rose 9.6% to 1.4 million units, the second-fastest pace this year, while multifamily starts were up 20.3%. Also, building permits rose 2.6% to 1.674 million units, besting expectations.

The news was giving a boost to homebuilders -- the S&P Homebuilding Index was recently up 1.8% -- but news of another suicide bombing in Israel and nagging feeling yesterday's rally was yet another false start were weighing on broader market averages.

But before determining the significance, or lack thereof, of today's session, let's see what the final hours of trading bring.

Microsoft Revisited

Yesterday's story about Microsoft (MSFT) drew scads of emails and was accompanied by scores of comments from devotees of technical analysis.

RealMoney.com contributor Gary B. Smith wrote yesterday that he'd be "interested in the long side" of Microsoft, if it were able to close above key resistance at $56. 'Soft traded as high as $56.44 intraday yesterday but closed up 0.8% at $55.68. Several readers were quick to declare Microsoft's failure to maintain momentum above $56 marked a near-term top for the shares, which were lately up 0.5% to $55.96.

Richard Arms, founder of Arms Insider, was also eyeing the resistance at $56 (specifically $56.44) in a recent piece for RealMoneyPro.com. But unlike Gary, Arms recommended "buying some [Microsoft] now, and rounding out the position when and if the breakout [beyond resistance] occurs."

Arms was particularly enthused by the action last Wednesday, when Microsoft "broke the descending trend line going back to January" and did so on both expanding volume and intraday range.

Today, John Roque, senior analyst at Arnhold & S. Bleichroeder (and a RealMoney.com contributor) took a similar tack to the one presented in my story: "We're big believers in bellwethers [and] right here we think Microsoft offers the best clues as to the ability of the major indexes to hold support levels or break," he wrote.

If $50 is going to be important support, Microsoft "must move away from it quickly and not be drawn to it again," wrote Roque. "If it does, then our scenario is of seeing it in the low $40s."

Assuming the recent rally continues, however, Roque focused on "important resistance" for the stock at $60 and beyond, rather than the $56 level spied by Arms and Smith.

"The only way [Microsoft] and the major indexes will improve significantly is if [Microsoft] can ultimately get above resistance in the low $70s," he wrote. "We know that's a long way from here but it's something to keep in mind."

(As an aside, it's interesting that three technicians can look at the same chart and can come to such differing conclusions, albeit with some common themes; sort of like three doctors looking at the same patient and making different diagnoses.)

For the record, Roque -- who has been steadfastly bearish for some time now -- provides upside targets for any near-term rally, as follows: Dow 10,000, S&P 1065 and Comp 1600. He believes yesterday was "not the beginning of something more important," given it was led by tech/telecom, brokers and biotech.

"Given the damage suffered by these groups we don't believe they'll be the 'leaders' when the market is ready to turn for good," he wrote. (Speaking of speculative favorites, today's leaders included Broadcom (BRCM), lately up 5.7% after at Morgan Stanley upgrade.)

Getting back to 'Soft and a more fundamental issue: Longtime reader and former Microsoft employee Krishna Nareddy expressed concerned about the level of insider ownership, which totals 16.7% of the approximately 5.42 billion outstanding shares.

"Microsoft was one of the earliest companies to have issued massive stock options to employees and one of the few such companies whose shares are still worth something," wrote Nareddy, who currently has no position in Microsoft. Therefore, "the odds are low that fundamentals can help Microsoft go much higher from here in the face of a huge float and massive supply overhang,"

A good and fair point, and one that got left on the proverbial cutting-room floor when I put the original story together.

For the record, Seabreeze Partners' chieftain and Microsoft bull Doug Kass was pretty sanguine about reports co-founder Bill Gates sold 8 million shares of 'Soft (worth more than $400 million) in early June and plans to sell 2 million more shares, now worth about $110 million.

"Regular program of selling for years and years," Kass said.

True. But it's also true Microsoft shareholders should be cognizant of the supply issue.

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