Once Again, a Fast Start's Been Undercut by Doubt

Stocks rallied sharply early Wednesday, but doubt springs eternal on Wall Street. There is good reason for that, given what's transpired of late, and given what happened again Wednesday as stock proxies surrendered once-impressive gains.

Early on, shares were spurred by a string of better-than-expected earnings from blue-chip firms such as Citigroup (C Quote), Boeing (BA Quote) and Coca-Cola (KO Quote), as well as investors' perverse "it could have been worse" reaction to Intel's (INTC Quote) disappointing results last night; shares of the chip giant were recently up 4.9%.

A rebound in the dollar further enlivened trading early on, helping shares overcome negatives such as concerns about subprime loans at Capital One Financial (COF Quote), lately down 34.8% and dragging down peers such as MBNA (KRB Quote), and disappointing earnings from firms such as J.P. Morgan(JPM Quote).

After having traded as high as 8723.37 early on, the Dow Jones Industrial Average briefly fell into negative territory around 1:00 p.m. EDT and was up 0.6% to 8520.95 as of 1:51 p.m. EDT. The S&P 500 was up 0.1% to 901.73 vs. its earlier high of 926.52 and midday low of 895.03, while the Nasdaq Composite was up 0.5% to 1381.75 vs. its morning best of 1426.28 and nadir of 1370.21.

Those looking for a reason for the market's midday swoon pointed to comments by Federal Reserve Chairman Alan Greenspan.

In the second day of his semiannual monetary policy report to the Congress, Greenspan gave the exact same prepared testimony as Tuesday. But in the Q&A session, he said: "We're poised for a reasonably good expansion [but] it will not be an expansion on the order of magnitude that we've seen coming out of the past recessions."

The chairman's point -- one made by many economists -- is that "because we didn't go down" as dramatically as in past recessions, "we can't go up" as far as in past recoveries. (The chairman was talking about the economy going down, not the stock market.)

One trader cited a "simultaneous sell" of both equity futures and the dollar as the trigger for the market's lunchtime swoon. He noted the dollar held up relatively better than stocks at midday and suggested that might mean the final hour won't be as wicked as some now fear.

Of course, cynical observers say there was no rationale needed to explain the selloff, other than the fact we're in a bear market where all rallies must be sold -- especially those built on dramatic preopening futures-buying. Others said the early rally was a function of traders squaring up positions (i.e., covering shorts and buying calls to offset puts) ahead of Friday's options expiration.

"The markets got oversold enough where another 'wonder rally' [was] inevitable," commented Ike Iossif, president of Aegean Capital in Chino Hills, Calif., and one of Timer Digest's top five market timers in the last 12 months. "However, I do not see the ingredients of an intermediate bottom yet."

To move beyond just an oversold condition, "we need a change in perception that either the fundamentals are improving and/or [that] stocks are cheap," Iossif continued. "I remain bearish on the economy, and I believe the danger is not staying bearish too long, but turning bullish too soon. Every fundamental piece of evidence I look at tells me that the U.S. will weaken further, profits are not improving, and neither is capital expenditures.

That's a fancy way of saying the biggest fear (still!) among the majority of market participants remains that of missing out on the next rally rather than of further losses. Until that changes, talk of capitulation is foolhardy, and "all we will get is bounces within a larger downtrend," Iossif said.

Softening Up

In mid-June I wrote about Microsoft(MSFT Quote) being a big tell for the market. At the time, several technicians noted crucial support at $50 for the stock and tough resistance at $56.

I wanted to revisit that issue because what's transpired since is telling, and certainly suggests there's something to chart-reading after all.

On June 17 and 18, Microsoft traded above $56 intraday, but failed to close above that key level. Conversely, Microsoft traded as low as $48 intraday Monday but rebounded sharply with the broader market, closing at $51.80. Wednesday, the stock has traded as high as $53.30 but was lately up 1% to $51.74.

Arguably, the fact that Microsoft couldn't sustain a move above $56 last month foreshadowed difficult times ahead for major averages. On the other hand, its ability to reclaim $50 mark on Monday presaged the market's bounce -- and also suggested the "real" capitulation had yet to occur. (Yes, it fell below $50 in early May, and perhaps that too augured selling for broader stock proxies.)

The bottom line is, whether Microsoft can break out of that $50-$56 range is going to be a critical determinant to the market's next "big" move.