Stocks Weaker on Heels of Friday Rally

The market may be in for some consolidation this morning following solid gains in broad-based rallies last week, as traders and investors take a step back to see whether optimism over cool economic data will hold. After weeks of abrupt swings on low volume, many strategists expect stocks will see some more downside before moving higher.

"Some profit-taking is due considering the way we finished out on Friday," said Bryan Piskorowski, a market analyst at Prudential Securities.

At 9:04 a.m. EDT, the S&P 500 futures were down 5.3 points, over 9 points below fair value and an indication of some selling pressure for the early going. The Nasdaq 100 futures had sunk even lower, down 46.5 points, an indication of some hefty selling sentiment for large-cap tech stocks at the open.

Certainly, sentiment has taken a turn for the better. A slew of cool economic data last week was topped off by Friday's soft employment report, reassuring the market that the Fed's interest rate tightening program is finally making a dent in the economy and inspiring speculation that the Fed will end its tightening sooner rather than later. In fact, the July fed funds contract, traded on the Chicago Board of Trade, is now pricing in just a 44% chance of a rate hike to 6.75%, compared with fully pricing in that rate hike just two days ago.

And there's plenty of money sitting on the sidelines that could be put to work.

But until Wall Street gets some more confirmation that the Fed's interest rate hiking program has begun to put the brakes on the economy, and until there are some more signs that stocks are indeed recovering, the market will probably continue to see choppy trade. This means breadth, follow-through and volume, according to Piskorowski.

"The market will continue searching for confirmation [that stocks have turned around]. It will keep an eye out for improving breadth and follow-through, especially in technology," said Piskorowski.

"Coming off of Friday we saw some better action, and we brought back those old generals that were the last ones to fall, the large-cap technology stocks. But the one thing that was created through this period of Fed uncertainty was a lack of liquidity, so the key is whether or not we see volume here," he said.

As far as economic data is concerned, the market will have to wait until Friday, when May's Producer Price Index will roll in. That number is expected to come in at a 0.3% gain, versus a 0.3% drop last month, according to Reuters consensus poll estimates. The core number is expected to come in at a 0.1% rise, on par with the previous month.

Meanwhile, a slew of lockup expirations could put some pressure on individual stock prices, but might also mean buying opportunities for fund managers who can only invest in stocks that meet minimum market-capitalization requirements.

The Treasury market was bounding higher this morning on relative weakness in stocks after posting modest gains Friday, and the 10-year note was up 10/32 at 102 22/32 and yielding 6.125%.

The large European bourses opened lower and continued down at midsession after posting substantial gains Friday. The Paris CAC was off 61.18, or 0.92%, to 6612.3, while Frankfurt's Xetra Dax was 60.09 lower, or 0.81%, to 7378.86.

Across the channel, London's FTSE lost 63.8, or 0.96%, to 6562.6.

The euro was trading down at $0.9432.

Most Asian markets posted solid gains in broad-based rallies overnight after the Nasdaq Composite rode up 6.4% Friday on soft U.S. employment data.

Hong Kong's benchmark Hang Seng index closed up 577.58, or 3.8%, to 15,861.68.

Korea's Kospi index climbed 33.52, or 4.4%, to 794.21, while Taiwan's TWSE index rose 22.57 to 8958.21.

In Japan, the Nikkei index closed up 401.73 points, or 2.4%, to 17,201.79.

In currency trading, the dollar was recently trading up at 107.61 yen.

For a look at stocks in the pre-open news, see Stocks to Watch, published separately.