Bulls Stay on Holiday

After a long weekend, sellers dominate, as fears about the Fed and consumer spending return.
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Anyone can wake up on the wrong side of the bed, especially after a long holiday weekend.

On Tuesday, the stock market was in a foul mood from the get-go, and the cumulative effect was a wipeout of the gains of the prior three trading days. The

Dow Jones Industrial Average

lost 1.63% to close at 11,101.87; all 30 Dow components fell for the first time since Sept. 22, 2004. The

S&P 500

fell 1.58% to 1259.87, and the

Nasdaq Composite

fell 2.1% to 2164.74.

Big Board

volume was a solid 2.1 billion, although Nasdaq volume was modest at 1.75 billion. Declining stocks led advancers by better than 3-to-1 in both venues.

The myriad excuses for selling took the forms of weaker European markets, a lower consumer confidence reading and

Wal-Mart's

(WMT) - Get Report

poor May sales report. Hawkish comments by Chicago Fed President Michael Moskow didn't help matters, and higher oil prices sealed the deal.

Gold rose 0.4% -- finishing

off of its intraday highs -- but there was little safe-haven flow into Treasuries. The 10-year note fell 7/32, its yield climbing to 5.08% from 5.05% Friday. The U.S. dollar also fell after finding a brief tailwind when President Bush announced his appointment of

Goldman Sachs'

(GS) - Get Report

chief executive Henry Paulson to succeed U.S. Treasury Secretary John Snow (more below).

With the "oversold" market having fixed itself with a three-day rally to end last week, the market was back to economics Tuesday, says Peter Boockvar, equity market strategist at Miller Tabak. "The short-covering and guys picking bottoms -- we've finished that, so you don't have that same natural buyer in the market," says Boockvar, a stock market bear of late. "It is down for the same reasons the selloff started a couple of weeks ago -- concerns about global growth."

Indeed, U.S. stock futures slumped ahead of the open Tuesday as European markets were down sharply in the first two days of this week. On Tuesday, London's FTSE 100 fell 2.4% and Germany's DAX lost 2.3%. Major markets in Asia were also lower, albeit less dramatically.

Then early Tuesday, Moskow confirmed many investors' worst fears with his comments on

CNBC

. He said that credibility is crucial to the

Fed

, and that inflation is running at the "upper end" of his target range of 1% to 2%, suggesting it is important to aim for the middle of that range. While Moskow is known as a hawk, the message is clear that the Fed is not averse to raising rates to fight inflation if the data support it.

While Moskow is not a voting member of the FOMC this year, his comments raised anxiety about Wednesday's release of the minutes of the May 10 FOMC meeting.

Moskow's hammering of inflation came as crude oil gained 0.9% to $72.03 per barrel Tuesday on news of increased demand from China. The price of gasoline went up 0.5%, or 1 cent, to $2.14 a gallon. Wal-Mart said that disappointing May sales -- up 2.3%, at the low end of its 2% to 4% forecast -- were due in part to the high cost of gasoline. Wal-Mart's shares fell 2.72% to $48.30.

You Say Tomato

Wal-Mart's May sales data -- reported Monday when U.S. financial markets were closed for holiday observance -- and Moskow's comments were followed by the Confidence Board's consumer confidence report at 10 a.m. EDT.

The data will be written about as "weak" or "lower," but were actually better than expected and likely would have been touted if the market had showed any strength. May confidence slid to 103.2, down from a revised 109.8 in April, but greater than the consensus estimate of 100.7.

In another example of bad news trumping the good, Deutsche Bank downgraded

General Motors

(GM) - Get Report

stock to sell from hold, sending the stock down 5.4% to $26.57. But also out of GM was news that it named Troy Clarke to head up its flagging North American division. Clarke has led GM's most profitable Asia Pacific division since 2004. Clarke is also known as a force in GM's relationship with the United Auto Workers, whose contract with GM will be renegotiated in 2007.

Even the bullish acknowledge that worry and anxiety have gripped the markets. "We admit to being somewhat worried that investors will not be able to distinguish the forest from the trees, and it could take a bit of time to get out of the current funk," writes Tobias Levkovich, chief U.S. equity strategist at Citigroup, who has a bullish year-end S&P target of 1400, as

reported here.

Elsewhere, Prudential Equity Group's chief investment strategist Ed Keon stayed the course, saying the U.S. stock market is still where risk pays a decent reward compared with other asset classes. Keon went so far as to increase his recommended allocation to the technology sector by 1% and reducing his energy allocation by the same amount.

"We knew going into today, even when I published the note, that we'd probably see the market open lower -- energy open higher and tech open lower," says Keon. "We suggested that people use that opportunity to reduce energy and take on tech."

Several economic releases this week could test the market's mettle much more than consumer confidence or Wal-Mart's sales. In addition to the FOMC minutes Wednesday, the Institute of Supply Management's manufacturing index comes out Thursday, and the May employment report is released Friday.

Perhaps Tuesday's fall means the market has anticipated bad news. Or perhaps investors aren't willing to withstand

the volatility and went into safe mode ahead of the week's slew of economic releases.

It's a Small World

As noted above, the dollar also fell Tuesday, despite Secretary-designate Paulson being widely lauded on Wall Street. The euro was trading at $1.2875 late Tuesday, up from $1.2745 Monday, while the dollar slid to 112.19 yen from 112.66.

Treasury secretaries with Wall Street experience usually coincide with a strong U.S. dollar, says Ashraf Laidi, chief currency strategist at MG Financial. In particular, Paulson's nomination recalls Clinton administration Treasury Secretary Robert Rubin, also a Goldman alumnus and a strong-dollar advocate.

"This was a defensive decision designed to prevent a further free fall for the dollar and to provide stability to the stock market, which is at risk of posting further declines due to inflation pressures, the risk of more Fed tightening, and midterm election woes," says Laidi.

Paulson's nomination also highlights the Bush administration's turn toward global imbalances, says David Kelly, economic adviser at Putnam Investments. Paulson highlighted his international way of thinking in his speech on the White House lawn Tuesday, saying that he's participated in the "globalization of finance."

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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