Market Grinds to Downbeat Finish as Rally Has No Legs

Yesterday's huge leap and today's early strength yielded to an uncertain close.
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Wall Street investors were all aboard the buying train this morning, after some weaker-than-expected economic data signaled a slowdown in the economy. But the Fed-watched numbers couldn't keep buyers coming in at full speed. By today's close, skeptics were considering the possibility of future rate hikes and braced themselves for the bumpy market conditions that might lie ahead.

This morning, investors turned the downticks upside down after receiving good news from the

Chicago Purchasing Managers' Index and April

new home sales

. The economic data gave evidence that the Fed's plan to cool the economy was in motion. With a six-to-nine-month lag, last year's Fed rate increases were finally producing results, leading buyers to believe that the worst was over.

"Any number that comes out at any time that leads the market to believe that

Greenspan is almost done tightening leads the customer base to go back into the market," said Patrick Boyle, director of trading at

Credit Suisse First Boston

.

But despite rallying for most of the day, the

Dow Jones Industrial Average finished the day in the red, down 4.80 to 10,522.33, with technology component

Hewlett-Packard

(HWP)

its biggest dragger.

The

Nasdaq Composite Index closed the session off 58.57, or 1.7%, to 3400.91, after posting a record percentage gain of 7.94%. Sellers cashed in some of their growth stock names, such as

Qualcomm

(QCOM) - Get Report

, unwilling to chance a pullback.

TheStreet.com Internet Sector

index sank 24.73, or 3%, to 791.63, with losses from

Lycos

(LCOS)

and

Amazon.com

(AMZN) - Get Report

.

The broader

S&P 500 fell 1.85 to 1420.60, while the small-cap

Russell 2000 slipped 0.52 to 476.18.

But the negative close didn't mean losses across the board, as investors rotated into sectors that took it on the chin during tech's heyday. In the face of rising rates, the interest-rate-sensitive financials were giving the Dow support throughout the session. "The group got beaten up after last week's comments on

Merrill Lynch

(MER)

, but they have managed to make a solid comeback," said Boyle, referring to banking analyst Judah Kraushaar's bearish call on

Goldman Sachs

(GS) - Get Report

.

The

American Stock Exchange Broker/Dealer Index

ended the day up 2.2%, with more than a 4% jump in Merrill Lynch. The

Philadelphia Stock Exchange/KBW Bank Index

advanced 1.1%.

Retailers were being bought up at cheap prices after being bludgeoned in the past few weeks on concerns of a consumer-spending slowdown. "Look at

Tiffany

(TIF) - Get Report

," said Ed Hemmelgarn, hedge fund manager at

Shaker Investments

. "The sector as a whole has gotten annihilated and the fundamentals are great but you still have a stock price that was up to 92 and is now down to 60."

Dow component

Wal-Mart

(WMT) - Get Report

climbed 12% to serve as the index's biggest gainer.

The

S&P Retail Index

hopped 4.1%.

Although volume has improved in recent sessions, it is still far from the record-breaking participation set earlier this year. "It seems like a slow day after yesterday's rally and some are disappointed that we didn't see more volume, said Jim Maguire Jr., managing director at

LaBranche

. "I think the volume will be somewhat subdued until we see the

employment

number come out on Friday. If it comes in in line or slightly weaker, I'd expected the market to rally because I think people are thinking that the Fed is almost done."

But it might not be time to break out the pom-poms and cheer on a rally just yet. According to some insiders, economic data can't be considered a tell-tale sign of what is in store for the market, even if it the Fed is thought to watch it closely.

"The employment number is somewhat of a lagging indicator," said Hemmelgarn, referring to Friday's upcoming

Labor Department

data. "The hiring process takes a while. Even after the economy slows down, people are still hiring, so it's not a reflection of where the eceomony really is. It shows what employers have done to account for past demand."

Market Internals

Breadth was narrowly mixed on moderate volume.

New York Stock Exchange:

1,722 advancers, 1,263 decliners, 960.5 million shares. 75 new 52-week highs, 45 new lows.

Nasdaq Stock Market:

1,952 advancers, 2,092 decliners, 1.514 billion shares. 47 new highs, 135 new lows.

For a look at stocks in the news, see the Company Report, published separately.