Friday's Market: Stocks End Lower, Ending Weak Week on Down Note

Stocks sputtered to a down finish Friday, ending a week marked by light volume, a bit of profit-taking, no catalysts and waiting for Greenspan. And, given the run-up the markets witnessed in April, Wall Street seems just fine with the breather.

The major indices were pressured by strong consumer confidence numbers that raised concerns about the level of interest-rate cuts and a downgrade of IBM(IBM Quote).

The Dow Jones Industrial Average shed 89.13 points, or 0.8%, to 10,821.31; the blue-chip index ended the week off 1.2%. The Nasdaq Composite shed 21.4 points, or 1%, to 2107.40; for the week, it fell 4%. The S&P 500 dropped 9.51 points, or 0.8%, to 1245.67. It ended the week down 1.7%.

A downgrade of IBM and worries that another round of earnings warnings is just around the corner also were pressuring stocks, said Tony Dwyer, chief market strategist at market research firm Kirlin Holdings.

"We've been pressured down by the IBM downgrade, Fed speculation, and general worries that we're getting towards the second quarter preannouncement season," Dwyer said. Still, he thinks the market didn't need much of an excuse to sell. "We're up 30% on the Nasdaq, and we haven't made any headway over the past two weeks. We could continue to see selling into Monday and Tuesday."

Indeed, since the start of May, investors have tempered the positive sentiment that helped drive stocks higher in April. There is still a major focus on concerns about corporate earnings, and this morning Bear Stearns dropped its rating on IBM to attractive from buy. It cited valuation concerns and the "potential impact" from tougher year-over-year comparisons for its second-half earnings.

As a result of the downgrade, IBM was the Dow's biggest loser, falling $3.39 to $111.81. But the cliche about misery and company held true. A total of 22 of the 30 industrials ended with losses.

Consumer sentiment figures, which have mostly been on a steady decline since September, were expected to show another dip this month. Instead, the closely watched University of Michigan index rose to 92.6 from 88.4 in April. Combined with strong April retail sales data released before the opening bell today, the confidence numbers sparked fears the Fed will cut interest rates by only a quarter-point, as opposed to the half-point cut the market has been expecting.

Data on wholesale price in April, also released before the market opened, was good news for the market since it showed inflation just about where expected. But the report wasn't good enough to inspire buying. The numbers could allay recent concerns inflation might become a problem.

Rash of Data Today
Economic Indicator	April	Forecast	March
Producer Price Index	+0.3%	+0.4%	-0.1%
PPI ex-food and energy	+0.2%	+0.1%	+0.1%
Retail sales	+0.8%	+0.2%	-0.2%
Sales ex-autos	+0.7%	+0.4%	-0.1%

Fed fund futures -- often a good gauge of market expectations for rate cuts -- have fallen steadily this week as people get cold feet ahead of the Fed meeting. Two weeks ago, a 50-basis-point cut sending short-term rates to 4% was a given. But judging from the futures, that outcome was less certain. Futures were pricing in about an 80% chance of a 50 basis-point cut when the Fed's policy-making body meets next Tuesday, lower than the 93% chance they were pricing in yesterday.

Bond prices were falling sharply today, pushing their yields higher.

Schering-Plough(SGP Quote) was jumping 5.3% to $39.11 on reports in Business Week that rival Merck(MRK Quote) is offering to buy it for $91 billion in stock. Merck fell 0.8% to $75.94.

Merck, the second-largest U.S. drug maker, hasn't confirmed the merger talk, but it did announce plans to acquire biotech company Rosetta Inpharmatics(RSTA Quote) for about $620 million. Rosetta gained 75.5% to $17.34 -- one of the biggest percentage gains today.

Stocks were weaker across the board, though losses were worst in a couple of ultra-defensive sectors, like gold and paper. Defensive stocks are usually seen as safe alternatives to growth stocks because their fortunes are more immune to changes in the economy.

Commodities and cyclical stocks also were weak. The Philadelphia Stock Exchange Forest & Paper Products Index fell 1.1% and the Philadelphia Stock Exchange Gold and Silver Index dropped 1.7%. The Morgan Stanley Cyclical Index fell 1%.

Retail was on the plus side today, still buoyed by yesterday's slate of same-store sales figures for April, which showed stronger-than-expected results for many companies.

Volume on the New York Stock Exchange came in at 896 million shares -- well below April's average daily volume of 1.25 billion shares. The Nasdaq Stock Market traded 1.37 billion shares -- much lower than this year's 2 billion daily average.

Jay Meagrow, vice president of trading at research company McDonald, said he doesn't expect much major action in the markets ahead of the Fed meeting. The fact that it's a spring Friday is also keeping trading action quiet.

April's stellar stock market rally has petered out over the past week, as investors began to fear buying was overdone. Earlier this week, doubts about a second-half turnaround that Wall Street had bet on through April, and caution ahead of the Fed meeting began to temper April's optimism. While investors are encouraged by prospects the Fed will cut rates at Tuesday's meeting, expectations for such a cut seem to be priced into stocks. If that's the case, then investors perceived little reason to keep buying in the near term. Some are predicting a moderate selloff in the meeting's wake.

Nonetheless, the major indices -- while off their all-time highs -- have come back a ways from recent depths, even with this week's pullback. The Nasdaq is up 28.6% since its 1638.80 close on April 4, the Dow is up 15.2% since closing at 9389.48 on March 22, and the S&P is up 11.5% since its March 22 close of 1117.58

Market Internals

Market Internals
Exchange	Advancers	Decliners	New Highs	New Lows	Volume
New York Stock Exchange	1,328	1,707	140	14	896 million
Nasdaq Stock Market	1,693	2,142	129	28	1.372 billion

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