Microsoft Is Pointing the Way South

Financial markets exhibited both their vulnerability and resiliency today, but may face tough sledding tomorrow.

After the close of trading,

Microsoft

(MSFT) - Get Report

posted third-quarter results of 49 cents per share, 2 cents shy of analysts' expectations; the software giant's revenues also missed expectations. More troubling, Microsoft also warned about its fiscal fourth-quarter results, forecasting earnings of 41 to 42 cents vs. current forecasts of 44 cents.

Microsoft shares were recently trading around $54.03 in after-hours trading vs. its regular session close of $56.37. S&P futures were lately down to 1118.00 in Globex trading vs. their settlement of 1123 in Chicago.

In the regular-hours session, stock proxies clawed back from a midday tumble after it became apparent the crash of a plane into a building in Milan, Italy was a tragic accident, rather than an act of terrorism.

Once as low as 10,057, the

Dow Jones Industrial Average

closed off 0.2% to 10,205.28. The

S&P 500

closed off 0.1% to 1124.47 after trading as low as 1109.29 while the

Nasdaq Composite

finished down 0.5% to 1802.43 after trading as low as 1778.10.

The Dow and S&P avoided bigger losses thanks largely to

IBM

(IBM) - Get Report

, which rose 4.8% after issuing some positive comments last night following its earnings report.

Conversely, safe havens such as bonds and gold rescinded some of the intraday gains generated in the immediate aftermath of the crash news. The price of the 10-year Treasury closed up 5/32 to 97 14/32, its yield falling to 5.21%. Gold futures ended up 0.8% to $305.20 per ounce.

The reaction to the Milan news "proves why the market can't go up," said Jim Volk, co-director of institutional trading at D.A. Davidson in Portland, Ore. "Everyone is scared of bad news and

don't react when there's good news."

Recounting tales of institutions sitting with 15% to 20% cash, Volk suggested "there's no compelling reason to buy stocks" when traders react so dramatically to news such as the Milan plane crash, or -- less dramatically -- today's larger-than-expected jobless claims report.

For all the talk of economic recovery, the corporate news continues to weigh on stocks, particularly in tech, the trader observed. "We keep hearing the worst is over and that you want to buy the good companies

but they haven't rallied."

Today, disappointing results by

KLA-Tencor

(KLAC) - Get Report

and

Advanced Micro Devices

(AMD) - Get Report

weighed on chips; the SOX fell 3%. Elsewhere,

Nokia's

(NOK) - Get Report

cutting its growth forecast and

SBC Communications'

(SBC)

warning about revenue growth and cutting its capital expenditures "put another pin in the telecom doll," the trader said; the Nasdaq Telecommunications Index fell 1.5%.

Of course, the market's ongoing jitters have some contrarian thinkers convinced (still) a near-term rally is in the offing.

"A month ago, strategists, economists and investors were all tripping over themselves proclaiming the end of the recession -- even debating whether we had been in recession -- forecasting a robust recovery and potential new highs on the Dow," recalled Dave Hunter, chief market strategist at Kelly & Christensen. "Now a short month later, investors are much more cautious and economists are scaling back their expectations for economic growth. With expectations lowered, the market seems poised to move higher once again."

Similar to when we last conversed in

early April , Hunter is forecasting a "sharp rally" that takes the Dow to as high as 11,000 and the Comp to between 2200-2400 before the bear market resumes, taking major averages to "significant new lows."

Hopes for a near-term rally were certainly damaged by the news from Microsoft although it might trigger a cathartic sell-off that ends tomorrow morning, mirroring the short-lived rally caused by

Intel's

(INTC) - Get Report

report Tuesday evening.

Sticks & Stones

Somewhat obscured by his comments on the likely path of monetary policy,

Federal Reserve

chairman Alan Greenspan jumped into the debate on the housing market during his

Congressional testimony yesterday.

"The ongoing strength in the housing market has raised concerns about the possible emergence of a bubble in home prices," Greenspan said. "However, the analogy often made to the building and bursting of a stock price bubble is imperfect."

Housing differs from stocks in many ways, the chairman noted, citing higher transaction costs -- financial, physical and emotional -- lower turnover rates, as well as the "much more limited" arbitrage opportunities. "Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole," Greenspan concluded.

Several readers therefore concluded that there's now nothing to worry about regarding housing and related stocks. Predictably, I got a few "

nyah, nyah, nyah, nyah

," emails from those who've been following my

series of stories about housing. To which I replied:

Oh yeah? Well my Dad can beat up your Dad.

More truthfully, I replied: If Greenspan saying "there's no bubble in housing" makes you feel better about your housing-related investments, more power to you.

My problem with such a view stems from the fact "for the five years through the summer of 2000 the Fed never, not once ... mentioned the world 'bubble' in relation to stocks," as Arnhold & S. Bleichroeder economic strategist James Padinha recalled.

Having never dubbed that "multiyear, once-in-a-lifetime type of up move in share prices" as a "bubble," the Fed therefore doesn't "refer to the crash as the 'bursting' of same," he continued. (Logically, you can't say a bubble has burst when you never said/admitted it was a bubble in the first place.)

Padinha, "heretofore...generally positive" on housing, now "wonder

s if Mr. Greenspan's comments aren't begging us to sell."

The buy, sell, or hold question notwithstanding, the point is Greenspan's public record of accurately spotting bubbles (even the biggest in history) is spotty, at best. Therefore, there's no foundation to declare the debate "over" based on his comments.

Speaking of the debate, Tobias Levokvich, equity strategist at Salomon Smith Barney, put his two cents into the mix today, citing "four key reasons not to buy into the housing bubble perspective": the underperformance of home prices vs. other asset classes in the past 30 years (save the last two); still low supply of new homes; housing starts still below previous peaks in the 1970s; and a stabilization in employment (although today's initial jobless claims exceeded expectations and continued claims rose to their highest level since February 1993).

In that context, Levkovich was "fairly upbeat" about homebuilders

K.B. Homes

(KBH) - Get Report

,

Centex

(CTX)

and

Pulte

(PHM) - Get Report

, although they underperformed today, falling between 0.4% and 1.9%.

Point being, the debate continues, regardless of what Greenspan said.

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.