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Roaring October Ends With a Peep

A historically 'scary' month only frightens the bears, but economic anxiety starts to make a comeback.

The ghosts of Octobers past can slink back into the shadows as the 2006 edition represented one leg of a strong three-month rally.

In the month of October, the

Dow Jones Industrial Average

gained 3.44%, and registered a 6.15% gain since the start of September. The

S&P 500

added 3.17% in October and 5.68% in the last two months, while the

Nasdaq Composite

recorded a 4.79% gain in October and advanced 8.38% since Sept. 1.

But investors can't rest on their laurels just because the seasonally scary months of September and October safely passed. Recent economic data are slightly unfriendly, and the coming election makes it difficult for the market to find reasons to surge farther ahead.

"Both sides are pointing out the negatives, not the positives, so it makes it difficult for the market to really advance during this time," says Marc Pado, chief market analyst at Cantor Fitzgerald.

Indeed, Tuesday's weaker-than-expected Chicago business activity index and consumer confidence report compounded some recently ugly housing data, a weaker-than-expected GDP report, and a warning from


(WMT) - Get Walmart Inc. Report

that suggests American consumers are starting to suffer. The stock market struggled and bonds rallied on the news as the fed funds futures market again ratcheted up the odds of a fed funds rate cut.

The Dow fell 0.05% Tuesday to close at 12,080.73, while the

S&P 500

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was unchanged on the day, closing at 1377.94. The Nasdaq Composite gained 0.12% to close at 2366.71.

The flattish action comes as many say the market is due for a rest but technicians says internals remain healthy.

"The advancers vs. decliners, the number of new highs, the ratio of up to down volume, have all remained relatively strong," says Louise Yamada, of Louise Yamada Technical Research Advisors. "I don't see anything damaging about this pullback. If the market comes back a couple of hundred points, it is no big deal."

Yamada, too says that the pending mid-term election may have superseded the typical October environment.

Meanwhile, recent data are reigniting concern about the economy. The Chicago purchasing managers index fell 8.6% to a reading of 53.5% in October. Economists had expected a decline to 58%. The inflationary component of the index was positive for the markets, however. Prices paid by area manufacturers fell 7.3% in October to a 62.5% level, reflecting the decline in crude oil prices, says Gary Bigg, economist at Bank of America.

October's consumer confidence also fell to a reading of 105.4 compared with September's 109.5 reading. The outcome was weak compared with expectations for a 107.8 reading. Behind the headline, expectations rose 1.8% in the month, while evaluations of the present economic situation fell 2.8%.

Fed funds futures traders have reversed the midmonth bets on possible rate hikes, and now price in a 44% chance of a rate cut by the March 2007 FOMC meeting, according to Marc Chandler, currency strategist at Brown Brothers Harriman. Last week, rate cuts were not expected until at least August of next year.

Odds of a rate cut at the January meeting rose to 12% Tuesday from 6% Monday. At their peak, January rate-cut odds reached 50% on Sept. 1.

Treasury bond traders were quick to adapt to the wave of weak data. The 30-year Treasury bond rallied 27/32 to yield 4.73% while the 10-year added 14/32 to yield 4.61%. The five-year note jumped 9/32 to yield 4.57%.

In corporate news Tuesday,


(IBM) - Get International Business Machines (IBM) Report

climbed 0.8% after announcing a $4 billion share-buyback program, helping the Dow overcome intraday weakness that brought it as low as 12,025.34.

Elsewhere, M&A news drove several stocks. Shares of

Sirna Therapeutics


gained 96% on news that


(MRK) - Get Merck & Co., Inc. (MRK) Report

will acquire the company in a deal worth $1.1 billion. Merck fell 0.5% on the news. Also, real estate company

CB Richard Ellis


plans to buy

Trammell Crow


for $1.8 billion. The news sent CB's shares up 6.41% and Trammel Crow's surging 24.7%.

Earnings remain relatively strong.

Eastman Kodak



U.S. Steel

(X) - Get United States Steel Corporation Report

beat analyst estimates, and their shares jumped more than 2%.

Procter & Gamble

(PG) - Get Procter & Gamble Company Report

also reported earnings that beat estimates but its shares shed 0.66% on the day.

Qwest Communications'


EPS also beat estimates but its revenue was a bit light; shares fell 4%.

So as a stronger-than-expected October ends, investors put the rally on hold with the election looming. But instead of relief that these scary months are behind them, there's an ever-growing unease about how long the market can avoid a correction, even in the traditionally strong months of November and December.

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


to send her an email.