Chitty Chitty Bang Bang! Market Sputters Along After Roaring Rally

Major proxies were in limbo at midday, with the Nasdaq Composite Index looking a little stunned after yesterday's record-breaking run-up.

Major Indices INDEX CHANGE % VALUE Dow 42.83 +0.4% 10,569.96 S&P 500 9.29 +0.7% 1431.74 Nasdaq 6.16 +0.2% 3465.64 Russell 2000 2.62 +0.6% 479.32 TSC Internet 1.54 +0.2% 817.90 NOTE CHANGE PRICE YIELD 10-Year Treasury 20/32 101 16/32 6.289%

Head-turning moves on the indices are a common occurrence nowadays, but yesterday's action, especially in technology stocks, definitely surprised some market watchers. The Comp rose 254.37, or 7.9%, registering as the largest percentage gain and second-largest point gain ever for the index. The previous percentage gain record for the Comp was set Oct. 21, 1987, when markets were rebounding from the crash known as Black Monday. But the mood was hardly celebratory and optimism was tempered by the persistence of light volume, not to mention the fact that the Comp currently remains more than 30% off its March 10 high. Lately it was up 6 to 3466.

Dan Ament, assistant vice president and investment executive at Dain Rauscher in Minneapolis, characterized the action as a "retail rally," without a lot of institutional volume. "A lot of the professionals are questioning whether this rally can sustain itself," he said, though he added that if it does, the institutional traders can't afford to ignore it or remain on the sidelines.

The Dow Jones Industrial Average was up 43 to 10,570, while the broader S&P 500 was up 9 to 1432. The small-cap Russell 2000 was up 3 to 479.

"It is sort of the equivalent of a tie, and that is sort of the market" we are seeing today, said Doug Myers, vice president of equity trading at IJL Wachovia in Atlanta. "There is a lot of profit-taking but also some people jumping in and buying. That's why we're getting this sideways motion right now."

A round of morning economic news was quickly looked over and placed on the back burner for the rest of the day. The Census Bureau said new home sales fell 5.8% to a 909,000 unit annual rate in April, compared with a forecast of 937,000. The number is still high, considering that March is the strongest month on record at 965,000 units.

In a separate report, the Chicago Purchasing Managers' Index fell to a seasonally adjusted 53.9 in May, compared with an expected reading of 56.9, according to a Reuters poll of economists. Any reading above 50 in the measure, which gauges regional manufacturing activity, indicates expansion. Of course, given this skittish, rate-fearing market, the weaker numbers were welcome news, but when you get down to it, the economy is still moving along at a rapid clip.

With the latest batch of interest-rate-related news out of the way, the next focus has shifted to Friday, when jobs data, including the unemployment rate, will be closely watched for clues to the Fed's next move.

"I still believe an increase is likely, probably in the 25-basis-point range," said Ament. He noted that today's data suggest a slowdown but that uncertainty remains over what cumulative effect the past series of rate hikes will eventually have on the economy. "My opinion is that we will hopefully see a soft landing, and not a hard landing," he said, though he added that we are only now approaching the 12-month mark from this cycle's first rate hike, last June.

Motorola (MOT Quote) was rising 1.6% after it set a $30 billion, five-year pact with contract manufacturer Flextronics (FLEX Quote). Flextronics was getting pounded 13.4%. The companies said Flextronics will supply certain parts for Motorola's products including its wireless phone, two-way pager and wireless infrastructure products.

Elsewhere in the communications sector, most stocks were flat or falling. Lucent (LU Quote) was losing steam, off 1.1% after it confirmed plans to buy fiber optical networking equipment company Chromatis for $4.5 billion in stock.

Meanwhile Qualcomm (QCOM Quote) was still smarting from yesterday's news its mobile phone technology won't be adopted in China. The stock was lately off 9.6%.

The oil-service sector got a lift on news that Baker Hughes (BHI Quote) and Schlumberger (SLB Quote) had agreed to combine their oil and gas exploration units in a joint venture, called Western GECO. Baker Hughes was rising 5.9%, while Schlumberger was up 3.6%. The Philadelphia Stock Exchange Oil Service Index was up 4.6%.

The Dow Jones Utility Average was in the green, powered for the most part by Enron (ENE Quote), up 2.5% after it entered a $1 billion, 10-year energy services pact with commercial printer Quebecor World (IQW Quote). Quebecor was up a fraction.

Internet stocks were mixed, with TheStreet.com Internet Sector index up a slight 1 1/2 points to 818.

The 10-year Treasury was lately rallying up 20/32 to 101 16/32, its yield at easing to 6.29%.

Market Internals

Breadth was mixed on moderate-to-light volume.

New York Stock Exchange: 1,682 advancers, 1,120 decliners, 504 million shares. 59 new 52-week highs, 27 new lows.

Nasdaq Stock Market: 1,808 advancers, 1,847 decliners, 844 million shares. 35 new highs, 77 new lows.

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For a look at stocks in the midsession news, see Midday Stocks to Watch, published separately.