Bonds Go On Tear, Stocks Snore

Treasuries soared Wednesday and stocks dozed in advance of Thursday's and Friday's economic reports.
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There are fast markets and there are slow markets. The stock market is clearly in slow mode, resuming its torpor on Wednesday. The Treasury market, conversely, continued to move at a torrid pace, albeit to the upside on this session.

The price of the benchmark 10-year Treasury note rose 31/32 to 94 18/32, sending its yield down 13 basis points to 4.31%. The advance came amid a sense that recent selling had been overdone and the Treasury Department's announcement that next week's quarterly auction will be $60 billion, a record but less than expected by most market participants.

Treasuries advanced despite a generally upbeat

Federal Reserve

beige book, in contrast to Tuesday, when they tumbled despite weak consumer confidence data.

The seemingly counterintuitive moves and recent "extraordinary volatility" in Treasuries reflect both "technical considerations" and a "pronounced change in sentiment" about the economy being able to improve significantly in the third quarter, said William Sullivan, senior economist at Morgan Stanley. (As discussed

here, there's also been a re-examination among bond market participants as to the wisdom of Fed policies.)

Tuesday saw a "disgorging of long positions having nothing to do with fundamentals," he continued, suspecting there's been some forced selling by mortgage-backed market participants because of the recent rise in yields. (On a related note, the Mortgage Bankers Association reported mortgage applications dropped 24.3% last week, while refinancing tumbled 33%, to its lowest level in a year.)

Similarly, short-covering was the "dominant force" in Wednesday's advance rather than fundamentals, Sullivan said, suggesting the rally was "not emblematic of a change in investor sentiment."

Looking forward, the economist said there is still "downside price vulnerability" in Treasuries, particularly if Friday's employment report and/or Institute for Supply Management survey prove better than expected. (To a lesser extent, the same holds true for Thursday's Chicago purchasing managers index and Friday's University of Michigan consumer confidence index.)

On the macro front Wednesday, the beige book cited anecdotal evidence "that the pace of economic activity increased a notch during June and the first half of July," while "nascent signs of a recovery emerged in manufacturing."

Coincidentally, or not, Wednesday's rally in bonds was accompanied by another show of strength by the dollar, which rose to 120.34 yen late Wednesday from 119.89, while the euro skidded to $1.1341 from $1.1459.

Tuesday's dollar strength despite the Treasury market's unraveling was a significant event "and the dollar may stay on the offensive ahead of a deluge of U.S. data

Thursday and Friday," commented Anne Parker Mills of Brown Brothers Harriman.

As is often the case, gold trades inversely to the greenback, with gold futures falling 1.5% to $358.10 per ounce. Some recently soaring precious metals stocks took a breather; the Philadelphia Stock Exchange Gold & Silver Index shed 1%.

Bonds Boom, Stocks Yawn

Despite some rather dramatic movements in other financial markets, especially Treasuries, the stock market resorted to its recent

"dog days" mode.

Amid lackluster volume and slightly negative breadth, major averages traded in a tight range before ending modestly lower. The

Dow Jones Industrial Average

fell 0.1% to 9200.05, the

S&P 500

shed 0.2% to 987.65 and the

Nasdaq Composite

dipped 0.5% to 1721.95.

Conventional wisdom suggests the stock market will reawaken Thursday and Friday in conjunction with the release of the aforementioned economic reports. Whether any revival of action leads to gains or heavy selling remains to be seen, but the old saw about never shorting dull markets is on some traders' lips.

In company-specific news, disappointing earnings and/or guidance weighed on a host of names, including

Duke Energy

(DUK) - Get Report

,

Pinnacle Systems

(PCLE)

,

Cree

(CREE) - Get Report

,

Genesis Microchip

(GNSS)

,

Multimedia Games

(MGAM)

and

Garmin

(GRMN) - Get Report

. (Big percentage declines in some of those over-the-counter names contributed to the Comp's relative weakness.)

Meanwhile,

Andrx

(ADRX)

and

CVS

(CVS) - Get Report

rallied after posting better-than-expected results.

Elsewhere,

AOL TimeWarner

(AOL)

fell 4.4% after the

Securities and Exchange Commission

asked to see documents related to its bulk-subscription program, while

Vivendi Universal

(V) - Get Report

shed 3.7% after

Metro-Goldwyn-Mayer

(MGM) - Get Report

withdrew its bid for the firm's entertainment division.

There was also notable weakness in airlines amid new warnings about potential terrorist threats against domestic carriers. The Amex Airline Index fell 2.7%.

In other developments on an relatively slow news day, the Investment Company Institute reported equity funds enjoyed inflows of $18.66 billion in June, the third-straight month of inflows and up from $11.9 billion in May. Bond funds took in $5.3 billion last month, down from $8.9 billion in May.

Finally, Chartcraft.com reported bullishness rose to 56.5% from 55.2% in its

Investors Intelligence

survey, while bearishness dipped to 19.6% from 19.8%.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.