Financial markets have a funny way of confounding expectations, as demonstrated again on Wednesday. Late Tuesday, "everybody" knew stocks would soar in reaction to solid postclose earnings from

Intel

(INTC) - Get Report

, while the Treasury market was deemed toxic.

Initially, that scenario appeared on track, as stocks rallied early while Treasury prices plummeted again, sending yields on the benchmark 10-year note to nearly 4.10%, its highest level since March 21. But those trends didn't last long, and major averages spent most of the day in modestly negative territory, while Treasury prices rebounded sharply from their early shellacking.

After trading as high as 9153.42, the

Dow Jones Industrial Average

closed down 0.4% to 9094.59. The

S&P 500

shed 0.6% to 994.09 vs. its intraday best of 1003.47, while the

Nasdaq Composite

slid 0.3% to 1747.97 after trading as high as 1767.90.

Wednesday marked the third straight session stock proxies have been unable to sustain early gains. Furthermore, Wednesday's early rally lasted the shortest amount of time -- barely 30 minutes -- and the intraday highs for major averages were the lowest of the week, thus far. Finally, market internals were the week's worst, with declining stocks besting advancing issues 23 to 9 in

Big Board

trading and 18 to 13 in over-the-counter activity. At 1.5 billion and 1.8 billion shares, respectively, volume was quite solid on this mildly negative session.

Recent action has generated some discussion about whether the postwar rally has (finally) peaked or is merely taking a respite. Little that occurred Wednesday provided clear evidence for either outcome, although the debate will certainly intensify if the decline accelerates.

News after the close from

IBM

(IBM) - Get Report

, whose second-quarter results were a penny shy of consensus estimates, could facilitate more weakness Thursday, at least in the early going.

The Semi-Logical Song

Commonly cited reasons for the stock market's setback included renewed concerns about North Korea's nuclear ambitions, as well as

Federal Reserve

Chairman Alan Greenspan's warning that "substantial and excessive" federal budget deficits will curtail economic growth over time. (All in all, though, day two of Greenspan's Congressional testimony was fairly uneventful.)

More mundane reasons for selling included disappointing results and/or forecasts from

Ford

(F) - Get Report

,

Lucent

(LU)

and

Coca-Cola Enterprise

(CCE)

, the latter weighing on

Coca-Cola

(KO) - Get Report

proper. Additionally,

Citigroup

(C) - Get Report

shares fell 3.2% following Sandy Weill's decision to

step down as CEO at year-end.

Meanwhile, there was some consternation in techland after Intel CEO Andy Bryant poured more cold reality on widespread hopes for a sharp rebound in tech spending. "We're trying to communicate that we're not seeing signs of economic recovery here," Bryant said in the firm's conference call. "We're not seeing a big upgrade cycle; we're not seeing IT budgets being raised suddenly." (On a related note, tech sector capacity utilization increased for a fourth straight month in June, but only to a still-tepid 62.9%. Overall capacity utilization remained mired at a 20-year low of 74.3%, as expected.)

Intel rose 5.2%, mainly because of its

better-than-expected guidance. But the Philadelphia Stock Exchange Semiconductor Index shed 0.6%, and the Nasdaq 100 dipped 0.2%.

Although likely confounding to less-experienced investors, the market's lackluster reaction to the Intel news makes some logical sense. Stocks -- especially tech proxies -- have rallied sharply this year in anticipation of a robust recovery; the SOX, for example, was up nearly 40% year to date heading into Wednesday's session.

Given that, it takes more than just "better-than-expected" earnings to send shares higher still. It takes

much

better-than-expected earnings and wildly effusive guidance. That fact doesn't pertain solely to the tech sector, either. For example,

J.P. Morgan

(JPM) - Get Report

shares were up 55% year to date heading into Wednesday's session, during which the stock fell 3% despite the firm's stronger-than-expected second-quarter results.

All that's a long-winded way of saying "valuations matter."

To skeptics, the most perplexing aspect of the recent rally is that some market participants seemingly have forgotten this, and this is shocking given the experiences that followed the "new era" rationalizations for outrageous P/E ratios in the late 1990s.

Evel Knievel, You've Got Yourself Some Competition

Equity valuations don't exist in a vacuum. Rightly or wrongly, the relative attractiveness of stocks is a function of yields on Treasuries. (Many say corporate bonds are a fairer comparison.) Given the recent sharp rise in yields, the already stretched valuations of equities appeared more egregious to some investors. Furthermore, there was some sense that the selloff in Treasuries had become overdone and that 10-year yields approaching 4.10% proved appealing, given the still-lackluster economic data.

The price of the benchmark note reversed its early losses to close up 15/32 to 97 19/32, its yield falling to 3.92%.

In conjunction with the aforementioned capacity utilization figures, the government reported industrial production rose 0.1% in June, in line with expectations. That's the second straight monthly increase, but industrial production is still down 1% on a year-over-year basis.

"Sustained

industrial production gains will depend upon continued momentum in final demand," observed Peter Kretzmer, senior economist at Bank of America Securities.

The problem, however, is that demand remains lackluster. The government separately reported that business sales were flat in May, albeit an improvement vs. April's 1.7% decline. Business inventories fell 0.2% in May vs. expectations for a flat reading. Inventory reductions are generally considered a harbinger of better times because low inventories mean production will have to increase to meet demand, although (again) evidence of such demand remains elusive.

The day's final piece of data was the consumer price index, which rose 0.2% in June, in line with consensus estimates. Core CPI, which excludes food and energy, was unchanged vs. expectations for a 0.1% rise.