Stocks Ignore Dollar

Major indices dip, but largely shrug off another potential woe. Skepticism is up.
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Like thoroughbreds wearing blinders as they race at the Kentucky Derby on the first Saturday in May, U.S. stock market investors may be similarly oblivious to what some say is a long-overdue correction.

Investors embraced the idea last week of an end to the

Fed's

tightening policy, but conditions on the track are muddying by the day. Despite modest declines for major averages, Monday was another session of investor stoicism in the face of would-be speed bumps such as high energy prices, a falling dollar and rising long-term interest rates. These signals suggest bullishness needs to cool off ... but maybe it already is

"If there is an oversupply of bulls, they sure aren't overanxious to buy this market," comments

RealMoney.com

contributor James "Rev Shark" DePorre. "They are easily scared out and the incessant talk about high gasoline prices is keeping them on edge."

Indeed, the

Nasdaq Composite

dropped 9.48 points, or 0.4%, to 2333.38 Monday, bringing its three-day decline to 37 points, or 1.6%. The index was weighed down by a 0.7% decline in the Philadelphia Semiconductor Sector index. The

Dow Jones Industrial Average

fell 11.13 points, or 0.1%, to 11,336.32, and the

S&P 500

was off 3.17 points, or 0.24%, at 1308.11. The 10-year U.S. Treasury rose 6/32 to yield 4.99%. The 30-year Treasury gained 16/32 to 91 11/32, yielding 5.07%.

Perhaps the only market ringing the warning bell is the U.S. dollar, which plunged to three-month lows against the Japanese yen and to a new seven-month low against the euro. The dollar dropped roughly 2.2% against the yen Monday to 114.25, vs. 116.65 late Friday, while the euro rose about 0.6% to $1.2411 vs. $1.2349. The dollar's weakness vs. the yen, in turn, weighed on proxies in Asia overnight, most notably Japan's Nikkei, which tumbled 2.8%.

The dollar fell after a widely heralded unprecedented G7 statement that singled out China, imploring it to revalue its yuan currency. The move, in concert with statements the IMF made last week, highlights that the rest of the world is increasingly worried about trade deficits. The U.S. trade deficit with China is currently valued at $202 billion.

Sweden's central bank's announcement Friday that it is reducing its proportion of U.S. dollar reserves by 17% continued to weigh on dollar sentiment, compounded by Russia's finance minister

dissing

dollars as a reserve currency as well, noted Ashraf Laidi, chief currency analyst at MG Financial Group.

"Although it has become somewhat fashionable to claim that the global economic imbalances do not matter, we think nothing could be farther from the truth," says Richard Bernstein, strategist at Merrill Lynch. "We have pointed out that the idea the U.S. can export its way out of its current trade situation is pure folly. ... Ultimately, the only way to correct the global imbalances is by constraining domestic U.S. consumption."

Whether gasoline prices near $3 per gallon will put an end to consumer spending is not yet clear. It certainly ignites the pump-side debate over whether oil companies should be taxed on their large profits. Some statistics on the consumer file are due this week, with retail sales data, consumer confidence and existing-home sales out Tuesday. Gasoline prices Monday stood at $2.908 per gallon, according to AAA's Fuel Gauge Report.

"While we expect consumption to slow toward its longer run trend of 3.25% or so, the risks to the downside are accumulating," says Mickey Levy, chief economist at Bank of America. "The almost 20% surge in gasoline prices in March and April will continue to erode the inflation-adjusted value of stronger nominal wage gains and healthy employment growth, suppressing growth in real disposable income."

Oil prices came off their highs Monday, responding largely to profit-taking and some political relief that Iran's President Mahmoud Ahmadinejad said that Iran would not use oil as a weapon. (

Phew. Now we just have to worry about nukes.

) Light, sweet crude for June delivery slipped $1.84 to close at $73.33 a barrel on Nymex.

While there are many out there riding the bullish horse -- including Prudential's Ed Keon, who upped his recommended equity weighting for the second straight week, to 65% from 60% -- indications of negativity are growing, which contrarians say is a positive sign.

The American Association of Individual Investors Sentiment index shows rising bearishness since the start of April. As of last Thursday, the index hit 40.83, up from its low last July of 14.05. The AAII's index of bullishness is falling, hitting 33.73 as of last Thursday, down from its high of 58.96 in January.

Similarly, the number of bullish investment advisers fell to 48% in the week ended last Wednesday, according to an Investors Intelligence survey, after surging to 53.2% the week prior. Bears increased to 26% from 24.5%, their first increase since they peaked at 33% six weeks ago, according to the firm's report.

"Historically, bulls are 55%-60% when indexes achieve record-highs, and those extreme levels of bullishness are negative," the report says.

"We've gone an unbelievable long amount of time without a 10% correction," says Liz Ann Sonders, chief investment strategist at Charles Schwab. The Dow hasn't seen once since June 2002, and since the bottom on March 5, 2003, the

S&P 500

has sustained only three corrections of more than 6% and none greater than 9%, reports

Barry Ritholtz, who notes that's a long stretch without a 10% decline by historical patterns.

Profit Parade

Among stocks in the news Monday,

Kimberly Clark

(KMB) - Get Report

rose 6 cents after hours after posting better-than-expected quarterly results. But

Caterpillar

(CAT) - Get Report

,

American Express

(AXP) - Get Report

and

Xerox

(XRX) - Get Report

fell after reporting earnings.

After the bell,

Sun Microsystems

(SUNW) - Get Report

was recently up more than 7% after reporting a wider-than-expected loss and

announcing that longtime CEO Scott McNealy would be replaced by President and Chief Operating Officer Jonathan Schwartz.

Yum! Brands

(YUM) - Get Report

was up 1.1% after posting results and raising its guidance.

Away from earnings,

Washington Mutual

(WM) - Get Report

said it is acquiring

Commercial Capital Bancorp

(CCBI)

, which rose nearly 11%, while

Cendant

(CD)

rose 65 cents, or 3.86%, after getting unsolicited offers to acquire its travel business for as much as $4.5 billion. The news helped boost other travel stocks such as

Travelzoo

(TZOO) - Get Report

and

Expedia

(EXPE) - Get Report

.

Finally,

Rambus

(RMBS) - Get Report

jumped more than 15% after receiving a

favorable court ruling in its long-running patent-infringement case with South Korea's

Hynix Semiconductor

.

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

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