Data Delight but Then Resistance Is Met

Early economic data had the market roaring early, but stocks gave up some gains late in the day.
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You can't always get what you want, although optimists got more than they needed Thursday to reawaken the stock market from its recent slumber. But the bullish opportunity was fumbled late in the day amid concerns about rising yields and rumors of distressed mortgage-backed market participants.

Following some initial hesitation despite better-than-expected data on second-quarter GDP, weekly jobless claims and the Chicago purchasing managers index, major averages jumped higher around 11 a.m. EDT.

Stock proxies were further buoyed early on by better-than-expected earnings from


(XOM) - Get Report


Procter & Gamble

(PG) - Get Report



(CB) - Get Report

, as well as a Merrill Lynch upgrade of chipmakers, including

National Semiconductor


. (

Cardinal Health

(CAH) - Get Report

was a notable laggard, falling more than 15% after lowering its guidance.)

Shares spent the afternoon holding steady at much higher levels before fading a bit at around 2:30 p.m., and then tumbling in the final hour.

After trading as high as 9362.40, the

Dow Jones Industrial Average

closed up a relatively paltry 0.4% to 9233.80. The

S&P 500

gained 0.3% to 990.31 vs. its best of 1004.59 while the

Nasdaq Composite

climbed 0.8% to 1735.14 after its apex of 1757.37.

For the month, the Dow rose 2.8%, the S&P by 1.6% and the Comp by 6.9%. That's the fifth-straight monthly gain for the S&P, the longest streak since 1998, according to Bloomberg.

The afternoon slippage was attributed to a variety of factors, including the S&P's inability to breach technical resistance at 1005, followed by its inability to sustain a close above 1000, something eagerly anticipated by some traders.

"It's another case of

the S&P getting to the higher end of the trading range,

not breaking through and then selling off at the end of the day," said Tim Heekin, director of trading at Thomas Weisel Partners in San Francisco.

Even at the day's heights, some skeptics suggested the rally was not as overwhelming as major averages seemingly indicated, citing lackluster market internals.

"Not to be too bearish here but on news like this, the markets should have thundered through old

resistance levels into new ranges," said one trader who requested anonymity.

At day's end, a healthy 1.6 billion shares had been exchanged on the

New York Stock Exchange

, but decliners led advancers 17 to 15. Over 1.8 billion shares traded over the counter, where advancers led 18 to 13 and 72% of volume was to the upside vs. 58% for the Big Board.

Storm Clouds in Fixed Income

For those who prefer more fundamental explanations, the most commonly cited rationale for Thursday's dispiriting ending was concern about rising bond yields. Heekin also mentioned that factor, which contributed to the relative weakness of NYSE stocks, which are typically more rate-sensitive than their Nasdaq-traded brethren. Notably, the Philadelphia Stock Exchange/KBW Bank Index struggled throughout the session, ending down 0.6%.

Many contend rising Treasury yields will scuttle the economy's rebound, and recent signs suggest strength in the housing sector already has cooled as a result. Such concerns very likely restrained stocks Thursday afternoon.

The healthy economic data sent Treasury prices sharply lower, in a resumption of recent trends. The price of the benchmark 10-year note fell 1 8/32 to 93 11/32, its yield rising to 4.47%. The 30-year bond tumbled 2 8/32 to 99 19/32, its yield rising to 5.40%. The session completed the worst month for bonds on a total return basis since March 1994, according to Lehman Brothers.

As bad as the session was for Treasuries, they did rally off the worst intraday levels amid rumors of big asset allocation trades out of stocks and into bonds. At its intraday low in price, the 10-year was yielding 4.56% and the 30-year bond also closed well off its session lows.

As discussed here in recent days, the selloff in the Treasury market has wrought havoc on fixed-income portfolios, particularly those with significant mortgage-backed securities components.

The MBS market has experienced the "most massive extension of duration in history," with average duration rising from 0.53 years at the end of May to 2.8 years currently, according to Jack Malvey, chief global fixed-income strategist at Lehman Brothers. "As you see this extension in duration" -- the measure of fixed-income securities sensitivity to movements in rates -- "the probability of prepayments decreases and now institutions need to increase selling of Treasuries to offset long mortgage-backed portfolios."

That factor has put downward pressure on Treasuries, Malvey said, further citing an upward reassessment of the economy's growth prospects, a reassessment of deflationary pressures and the wisdom of Fed actions to combat them, foreigners' decreased appetite for Treasuries and the likelihood of greater supply ahead in the wake of record-setting deficits. "All contributed to this sharp, quick sell-off," he said.

The speed of the sell-off and volatility within usually staid fixed-income markets has contributed to rampant speculation that some participant or participants are in serious trouble.

"During sudden swings in any capital market, it's natural for some institutions to be caught offsides," Malvey said. "It could be a dealer, a hedge fund, a commercial bank. All sorts

of participants could get hurt."

However, there's typically a lag between market action and revelations of any specific problems, he said, recalling that after a big rise in yields in the spring of 1994, most market participants didn't become aware of Orange County, Calif.'s problems until December of that year.

In other words, this story is long from over.

Kibbles and Tidbits

Concerns about Friday's employment data and national Institute for Supply Management survey were also cited as contributors to the afternoon retreat. However, Thursday's data generated big expectations for tomorrow's reports.

At 55.9, the July Chicago PMI was up for the third straight month and to its highest level since January. The new orders component, at 61.7, was at its highest level since November. Those figures spurred expectations that Friday's national ISM survey will best expectations of 52.0.

Employment in the Chicago survey rose to 46 from 43.8 and weekly jobless claims fell to 388,000, a second week below the closely watched 400,000 level. Those figures encouraged speculation that July payrolls will rise more than consensus expectations of 10,000. (The unemployment rate is expected to remain at 6.4%.)

Meanwhile, perhaps the biggest news of the day was the advance second-quarter GDP report, which rose 2.4% vs. expectations for more tepid growth of 1.5%. Furthermore, a decline in inventories shaved an estimated 0.8% from the headline figure, which (let's recall) is subject to revisions. Low inventories are believed to be harbingers of faster growth because production will have to ramp up faster to meet demand. (Similarly, the inventory component of the Chicago PMI report fell to 39.4 from 48.8)

Prior to Thursday, the conventional wisdom was the second-quarter GDP was a lagging indicator, and that the expected weakness should not restrain the "forward-looking" equity market. Of course, when the number proved much stronger than expected, the optimists were enthralled, at least for a few hours.

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

Aaron L. Task.