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After the Rally: Stocks Resume Digestion

Chips slip, but Apple buoys major averages; Cisco rallies postclose. Treasury yields fall.

It's after a breakthrough that the best work can be done. Or so any good psychologist or therapist would say.

Days after myriad averages hit record or multiyear highs, a flurry of

Federal Reserve

speakers couldn't rile up traders Tuesday. But the market was working its way through some ever-present issues: global imbalances, the gap between rich and poor in America, the shackles on digital music, and whether the semiconductors can actually have a good run or not.

Late in the day, a bold statement from


(AAPL) - Get Apple Inc. (AAPL) Report

Chief Executive Steve Jobs about the future of digital music helped edge the markets into the green as oil remained below the $60 watermark. Apple, which closed up 0.8%, jumped as soon as Jobs posted his treatise, which called for the major record companies to abolish digital rights management -- a technology that limits the transferability of digital music.

On the face of things, such a system arguably would be negative for Apple, but the company's dominance in the field of digital music devices puts Apple in a position to benefit from more digital music freedom.



(WMT) - Get Walmart Inc. Report

was up 0.1% on news it is joining the digital download scene. The retailer launched a test program on its Web site to allow visitors to download movies and television content.

Shares might have gone up more Tuesday, but a federal appeals court granted class-action status to a group of women who claim Wal-Mart was discriminatory in deciding on pay and promotions. This marks the largest sexual-discrimination lawsuit in history.

Broadly, the

Dow Jones Industrial Average

added 0.04% to close at 12,666.31, while the

S&P 500

added 0.07% to close at 1448; the

Nasdaq Composite

added 0.04% to close at 2471.49.

"Without a catalyst, sideways is not surprising," says Art Hogan, chief market analyst at Jefferies & Co., lamenting the slow feeling so far this week. "The Cisco report is the only game in town," he quips.


(CSCO) - Get Cisco Systems, Inc. Report

postclose earnings

bested expectations, and the report was initially welcomed by the market. Then traders sold the news in typical tech-earnings fashion. But the stock was recently up 4.8% in after-hours trading after the networking giant raised sales guidance for the third quarter.

Like a big do-over, the semiconductor sector reversed much of

TheStreet Recommends

Monday's gains on Tuesday after

National Semiconductor


offered weak earnings guidance for 2007. National Semi slid 2.7% while the Philadelphia Semiconductor Sector Index fell 0.5% and the

Merrill Lynch Semiconductor HOLDRs

(SMH) - Get VanEck Vectors Semiconductor ETF Report

fell 0.7%.

Bucking the trend was graphics-chip maker


(NVDA) - Get NVIDIA Corporation Report

, which advanced 3.5% following a JPMorgan upgrade.

Topsy-Turvy Treasuries

The 10-year Treasury note rose 10/32 Tuesday, its yield falling to 4.76% in part because Treasury Secretary Henry Paulson forecast the economy is "transitioning from a period of above-trend growth to a more sustainable level of about 3% growth," in testimony for the House Ways and Means Committee.

Treasury yields have fallen sharply after approaching 5% last week ahead of Friday's jobs report, having gotten slightly "ahead of themselves" in worrying about rate hikes, says William Hornbarger, fixed-income strategist at A.G. Edwards.

Hornbarger says the subsequent rally (in price) was largely technical, saying that when the 10-year yield fell below 4.80%, buyers jumped in to send it further down.

"In the topsy-turvy conundrum world we live in, it is hard for me to make a really bullish case for bonds, unless I were to believe we're going into a hard economic landing," says Hornbarger, who expects the 10-year yield to remain in a 4.8% to 4.9% range.

Tuesday's Fed speakers were mum about interest rates and the economy. Indeed, Fed Chairman Ben Bernanke didn't mention monetary policy in his speech to the Greater Omaha Chamber of Commerce. Instead, he wandered into the topic of inequality among Americans due to widening gaps in technologically savvy education. He also noted that the lack of unions and globalization as reasons for the rising inequality. But Bernanke emphasized that protectionist policies are not the answer to improving opportunities for people in the U.S.

Chicago Fed President Michael Moskow didn't reveal anything about monetary policy in his speech, and San Francisco Fed President Janet Yellen kept her remarks to the topic of China's currency, the renminbi.

While stock and bond traders are not yet focused on foreign exchange, the upcoming G7 meeting could provide a start to currency markets and therefore other asset classes.

European finance officials have called this week for discussions about the weak Japanese yen. Paulson has said he believes the markets should decide currency values, and China's currency is the key issue for the U.S., notes Marc Chandler, chief forex strategist at Brown Brothers Harriman and a

contributor. Chandler adds that Canadian officials haven't indicated that Japan or China are focal points for them in the upcoming meeting, and U.K. officials have said they want the fundamentals to drive the currency markets as well.

But with the European hue and cry over the weak yen, if the G7 makes no mention of the Japanese currency in its postmeeting


, the very absence of any comment could ignite another wave of carry-trade enthusiasm. If traders pile back into yen, that just means more liquidity ... and more stock market rallying?

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


to send her an email.