A Greenspan-led rally faded Tuesday as the

Nasdaq Composite

hit technical resistance levels at the same time another

Fed

official reminded the market why the central bank may continue raising rates longer than most would like.

Overnight comments from the Fed chairman originally fueled hopes that rate hikes are near the end, helping propel the

Dow Jones Industrial Average

as high as 10,579 early in the day. But Tuesday afternoon, Atlanta Fed president Jack Guynn expressed concern about both the housing market and unit labor costs, and said the Fed has not yet reached a neutral policy stance. Guynn's comments went a long way in undoing some of the Greenspan-induced high.

The Dow still held up in positive territory, finishing up 16.04 points, or 0.2%, at 10,483.07. The blue-chip average was shouldered by the likes of

General Motors

(GM) - Get Report

, which announced 25,000 layoffs over four years. Meanwhile, the

S&P 500

fell a fraction to 1197.26 after trading near 1209 intraday.

The

Nasdaq Composite

lost 8.60 points, or 0.4%, to 2067.16. The tech-heavy index began falling back after meeting resistance around 2095, a level not surpassed since early April. "It's all right if we get a pullback from here," says Barry Hyman, equity strategist with Ehrenkrantz King Nussbaum.

Contributing to the Nasdaq's downside was

Sears Holdings

(SHLD)

, which fell 8.6% after posting a first-quarter loss of $9 million. But overbought conditions have been flashing on the screens of many equity strategists since last week. The tech-heavy Nasdaq, for one, is still up nearly 9% since hitting this year's low of 1,904.18 on April 28. The Dow is up 4.7% from its low of April 20, and the S&P 500 is up 5.2% from its low of the same day.

But seeing the leader of the market's six-week rally lose steam may mean a pullback is beginning, says Hyman. He also believes that low measures of market volatility, such as the CBOE's market volatility index, are pointing to too much complacency on the part of investors. After trading as low as 11.47, the VIX closed up 0.9% at 12.39.

Despite seeing the potential for a near-term pullback, a summer rally that takes the major indices beyond their March highs is still possible, Hyman says. The big Wall Street powerhouses, he noted, are holding one tech conference after another, and these should continue fueling interest in the sector. Some of the sector's stars, such as

Texas Instruments

(TXN) - Get Report

and

Intel

(INTC) - Get Report

, "still have good stories to tell," Hyman says. (Indeed, after the close, Texas Instruments offered

upbeat guidance and was recently up 2.4% at $27.94 in after-hours trading.)

Furthermore, as long as benchmark Treasury yields remain below 4%, investors will continue reallocating assets from bonds to equities. And if Greenspan is correct in saying Monday night that yields may stay low for a while, that would bode well for a summer rally.

On Tuesday, the benchmark 10-year Treasury bond finished up 12/32, its yield falling back to 3.90%.

Of course, the summer rally could be short-circuited if there is a major change in the outlook for interest rates. Hyman does expect the fed funds rate to peak at 3.50% this year, which he doesn't see as a major obstacle to his year-end target of 1270 on the S&P 500.

But there's reason to believe that there is a lot more than two more rate hikes in store.

The market's recent rally has been supported by the belief that inflation remains contained, as evidenced in the May consumer price index and amid signs of economic softness. These include indications last week that the manufacturing sector is close to the contraction level and that May employment was weak.

"But outside the factory sector, conditions look much more stable," says Goldman Sachs economist Ed McKelvey, who notes that construction outlays are rising and that consumer confidence appears to be stabilizing.

That strength, related to the housing boom of the past few years, is likely near the top of Greenspan's list of worries on inflation, together with rising unit labor costs.

The market on Tuesday first focused on

Greenspan's acknowledgement that expectations of slowing global growth may be a factor keeping bond yields low. But it paid little attention to the portion of Greenspan's speech addressing inflationary risks.

Double-Edged Fedspeak

The Fed chairman suggested there are other forces at play that keep fueling growth and inflationary pressures. Last night, he mentioned that low long-term rates have encouraged more risk-taking by hedge funds. He had previously acknowledged that there may be bubbles or "froth" in the real estate market.

And to back up the point, Atlanta Fed President Guynn said Tuesday that he didn't believe that housing valuations in certain southeastern cities are sustainable.

Last week, Dallas Fed President Richard Fisher, a new member of the Fed's rate-setting meeting, made headlines when he said that the Fed's next June meeting would be the "ninth inning" of the central bank's rate-tightening schedule. Though Guynn is not a voting member, his comments are going some way toward undoing the perception that Fisher was speaking on behalf of the Fed.

As the Fed's chief "umpire," Greenspan will be the one providing more clarity on the subject Thursday when he testifies before Congress on the state of the economy.

To view Aaron Task's video take on today's market, click here

.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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