Clear as Mud: Retail Sales Adds No Certainty and Stocks Struggle

The market's running in several different directions this morning and misfiring on most cylinders. The second straight weak monthly retail sales report held the market down for most of the morning, but while a few defensive sectors on the New York Stock Exchange are holding steady, the Nasdaq has been hindered by broad technology weakness.

Major Indices INDEX CHANGE % VALUE Dow 30.67 -0.3% 10,533.54 S&P 500 2.74 +0.2% 1448.74 Nasdaq 47.44 -1.3% 3720.47 Russell 2000 6.34 -1.3% 502.17 TSC Internet 19.42 -2.2% 880.66 NOTE CHANGE PRICE YIELD 10-Year Treasury 8/32 102 25/32 6.114%

The Dow Jones Industrial Average was lately down 31, or 0.3%, to 10,534, largely due to Hewlett-Packard (HWP), which Sanford Bernstein downgraded this morning. The S&P 500 was up 3, or 0.2%, to 1449, while the Nasdaq Composite Index was down 47, or 1.3%, to 3720, thanks to weakness in computer and Internet stocks.

The Census Bureau said retail sales declined by 0.3% in May, following a revised 0.6% decline in April. That aside, retailers are holding firm today, more a reaction to two weeks of relative weakness in those stocks. Dow component Home Depot (HD) was up 1 3/8 to 47 5/16, while Sears (S) had gained 1/8 to 34 1/8.

The slowing economic growth portended by two consecutive soft retail sales reports argues that the Federal Reserve's efforts to slow the economy are working. However, it also increases the likelihood of reduced corporate profits and slower earnings growth in coming quarters.

Seeing as how the market is currently in that period where companies are issuing preannouncement warnings of slower growth, stocks have behaved jittery for most of the morning.

With these thoughts in mind, the market is gravitating toward defensive stocks, products and services that people need even if economic growth is on the wane. Drug stocks are strong today, evidenced by Merck's (MRK) 4.1% rise and a 2.6% gain in the American Stock Exchange Pharmaceutical Index. Food stocks were rising. General Mills (GIS) had gained 2.4%, and Quaker Oats (OAT) was up 2%.

The Dow Jones Utility Average was just 4 points off its all-time high of 336.03, gaining 0.8%, led by Southern Co. (SO).

"We're sort of in that delicate balance," said Eddie Laux, head trader at ABN Amro. The retail sales figure is "saying that earnings for a lot of companies are going to be lower, and there's nothing on the flip side to give the market assurance that the rate hikes are over with."

That's because slower economic growth won't stop the Fed if rising inflation is still a threat. With the price of crude oil lately more than $32 a barrel, strategists are having a hard time dismissing thoughts of rising inflation, even if last week's Producer Price Index was unchanged in May.

Tomorrow, the broader consumer inflation measure, the important Consumer Price Index, will be released.

The rise in oil prices is rewarding the oil stocks today, although not quite with yesterday's gusto. The American Stock Exchange Oil & Gas Index was up 0.1%, led by Phillips Petroleum (P) (up 2.2%) and Dow component ExxonMobil (XOM) (up 0.9%). Other commodities stocks were mixed, although the Philadelphia Stock Exchange Gold and Silver Index was up 1.4%.

Strategists expected last week's rally would be met by profit taking and lackluster trading, especially with the CPI report due this week. Barry Hyman, chief market strategist at Ehrenkrantz King Nussbaum, believes the market can resume its earlier rally, but not until it gets some supportive statements from Fed officials. That may happen later today, as Fed Chairman Alan Greenspan is scheduled to speak just after 1 p.m. EDT.

"I would personally like to see more commitment from Greenspan or Fed officials in their rhetoric," said Hyman. "I'd like them to finally say, 'We're slowing, this is a good sign.' That would be the indication that maybe the June [27-28 Fed meeting] brings nothing."

It's all going wrong for technology today. The semiconductor names, such as Applied Materials (AMAT), which was off 2.1%, were sliding.

Computer boxmakers were down after this morning's downgrade of Dow component Hewlett-Packard, off 5.6% and contributing 41 points of negative drag to the 30-stock average. Dell (DELL) and Compaq (CPQ) are also lower.

The Internet isn't really the place to be today, either. NBC Internet (NBCI) warned of lower earnings and advertising sales, and the stock was lately down 8 13/16, or 35.8%, to 15 13/16. It prompted Hyman to say, "It's hard enough to survive as a Web site or a community site without backing. Here's one with backing ... and the stock is still down 40%."

TheStreet.com Internet Sector index was down 2.2%, led by a 3.8% decline in Yahoo! (YHOO) and a 3.5% drop in Amazon.com (AMZN). About.com (BOUT) was also doing poorly, down 14.1%.

Market Internals

Breadth was mixed on light volume.

New York Stock Exchange: 1,427 advancers, 1,346 decliners, 492 million shares. 44 new highs, 36 new lows.

Nasdaq Stock Market: 1,387 advancers, 2,383 decliners, 713 million shares. 28 new highs, 44 new lows.

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

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