December Turning Into a Rally-Killer

So far, the usual year-end boost for stocks hasn't materialized, and the rally appears to be fading.
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After marching along the comeback trail Wednesday afternoon, stock proxies once again found themselves far below break-even midday Thursday. There were some fundamental reasons for the decline, but traders also were overlooking some positive developments, which is a marked change from recent trends.

As of 1:39 p.m EST, the

Dow Jones Industrial Average

was down 1.1% to 8639.81, the

S&P 500

was lower by 1% to 908.74, while the

Nasdaq Composite

was off 0.9% to 1418.01.

Issues weighing on shares included lackluster November retail sales, cautious comments from

Gateway

(GTW)

, and heightened prospects for a bankruptcy filing by

UAL

(UAL) - Get Report

after the Air Transportation Stabilization Board rejected its application for a $1.8 billion federal loan guarantee. Gateway was lately down 15.8% and UAL was off 69.6% before being halted.

Additionally, there are worries about

Intel's

(INTC) - Get Report

midquarter update after the close, Friday's employment report, as well as the approaching deadline for Iraqi compliance.

However, the declines also came amid some positive news developments, including a larger-than-expected, 50-basis-point rate cut from the European Central Bank, another drop in weekly jobless claims, and some upbeat comments from

Advanced Micro Devices

(AMD) - Get Report

.

A few weeks ago, such a combination of news would have sent shares skyward, particularly those of the chip and related groups. AMD lately was up 4.7%, but the Philadelphia Stock Exchange Semiconductor Index was down 0.4%, further evidence that the worm -- and the mood -- on Wall Street have turned to the negative, at least for the time being.

Heading toward the close, it will be critical to see whether the S&P can recover above support at around 910, as was the case

Wednesday, or whether selling will accelerate and take the index to a test of even more critical support at 900. Thus far, the index has traded as low as 905.90.

As the losses mount -- this would be five straight for major averages -- concerns are rising that the post-Oct. 9 rally is over and that December will not live up to its historic performance as one of the market's best months.

"Any hiatus in forward momentum, as seems to be occurring as we enter the December period, may be met with some well-deserved profit-taking, if not outright selling," observed Louise Yamada, director of technical research at Salomon Smith Barney. "Our approach has been, and remains, to raise stop-loss levels to lock in gains, and to maintain a risk-averse discipline in the event the rallies evaporate."

Yamada's caution stems, in part, from an observation that "there has not been an impressive volume day since Nov. 21; in other words, no follow-through."

On the other hand, there has yet to be a session of expanding volume on the downside either, and activity was modest again midday Thursday. Of late, 807 million shares had been traded on the

New York Stock Exchange

and 994 million shares in Nasdaq activity.

Other People's Markets

Once again, weakness in equities was having little positive effect on Treasuries. The price of the benchmark 10-year note was recently up 6/32 to 98 31/32, its yield falling to 4.13%.

In currency trading, the dollar rallied to a six-month high vs. the yen after Japan's vice finance minister, Haruhiko Kuroda, said the yen's recent fall wasn't too fast and stemmed from the currency's "excessive strength."

Meanwhile, the euro rallied initially on the ECB rate cut -- which will presumably spur growth in the eurozone -- but has since retreated amid concerns the ease eliminates some of the yield differential between the single currency and the greenback. The gap between yields on three-month euro vs. dollar deposits has narrowed to 1.54% from 1.8% on Nov. 8, according to

Bloomberg

.

With its first rate cut since November 2001, the ECB lowered its target rate to 2.75%, and has now cut rates four times since the beginning of 2001. The

Federal Reserve

has cut rates 12 times in the same time frame to its current level of 1.25%.

One apparent beneficiary of the ECB's rate cut was gold, which some see as a proxy for investors' perception of central banks. The price of gold was lately up 0.8% to $325.60.

Crude futures also were higher after a tanker captain joined a strike against Venezuelan President Hugo Chavez, Crude futures were lately up 2.4% to $27.34.

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.