Rita Relief Proves Fleeting

Johnson believes the market may have to retest its lows made in late June before rebounding. The June lows, all hit on June 27, were 1190.49 for the S&P, 10,290.78 for the Dow and 2045.20 for the Nasdaq.

And it seems that there will be plenty of occasions to sell this week, as the profit-warning season gets under way. Alcoa (AA) opened the season last week, warning that higher raw-material costs and the potential impact of Katrina would hurt profits. On Monday, FedEx (FDX) warned that its second-quarter profits will be hurt by Katrina, though it couldn't say by how much, and its shares rose 0.7%. And Citigroup sliced its earnings outlook on Caterpillar (CAT), citing high raw-materials costs; Caterpillar lost 1%.

Among other individual stocks, Palm (PALM) finished lower and Microsoft (MSFT) finished flat, even after reports that Palm will unveil a new version of its Treo smartphone that uses Microsoft's Windows software.

Strangely Cheerful

In addition to crude's path and presumably more warnings as the third-quarter comes to a close, there will also be a lot of economic data to move the market this week, including consumer confidence data on Tuesday and Friday, durable goods Wednesday, and Thursday's final reading of the second-quarter GDP. There will also be more appearances by Federal Reserve officials. The Fed has not been too market-friendly lately, especially after it dashed hopes for a pause in its rate-hike campaign last week. Not only did it deliver its 11th rate hike in a row last Tuesday, it also promised more by emphasizing its concerns about inflation.

That was also the case Monday. In another example of how he earned his "Maestro" nickname, Fed Chairman Alan Greenspan reassured the markets about economic growth post-Katrina as he "somewhat" moderated his call about housing.

"The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices," Greenspan told the American Bankers Association. He was also more vague than he was in late August about the housing market cooling down.

"It is still too early to judge whether the froth will become evident on a widening geographic scale or whether recent indications of some easing of speculative pressures signal the onset of a moderating trend," Greenspan said.

That maybe because the National Association of Realtors said Monday morning that sales of existing homes rose 2% to 7.29 million in August, the second-highest level of sales on record, from 7.15 million the previous month. Wall Street economists were expecting sales to drop to 7.11 million.

Furthermore, the median price of existing homes rose to a record $220,000, a 15.8% gain from August last year.

Homebuilding stars as Toll Brothers (TOL), Lennar (LEN), and Ryland Group (RYL), all rose in reaction to the data, but as with the major averages, they finished off their intraday highs. The Philadelphia Stock Exchange Housing Sector Index rose 1.3%.

Still, according to Wachovia economist Gina Martin, the supply of existing homes has "steadily crept up over the past few months," which could confirm that sales of existing homes could be close to topping out. "At August's pace of sales, 4.7 months of homes stand ready for buyers," Martin notes.

If mortgage rates continue to rise, "sales prices will have to adjust downward or affordability will continue to squeeze would-be buyers out of the market, and homes will sit available for sale longer," she continued.

Meanwhile, other Fed speakers -- including Fed governor Susan Bies and Chicago Fed president Michael Moskow -- also stressed the central bank's concerns over inflation, while sounding strangely cheerful about the economic outlook. In reaction, the 10-year Treasury bond finished down 13/32 in price while its yield, which moves inversely, rose to 4.30%.

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