The Unfriendly Trend

After a one-day reprieve, the pattern of afternoon declines re-emerges with vengeance.
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After some confusing trading on Wednesday, the markets sent a crystal-clear signal on Thursday that the word of the year is "down," as in fall down, take down or (if this keeps up) maybe even meltdown.

Reversing the prior day's closing-hour gains, the markets dropped sharply in the final hour.

General Motors

(GM) - Get Report

issued disappointing 2005 earnings guidance, and news hit that the Treasury Department was limiting the use of money brought back into the country under the corporate tax cut law approved in October.

The

Dow Jones Industrial Average

lost almost 112 points, or 1.1%, to 10,505.83. The

S&P 500

fell 0.9% to 1177.45, and the

Nasdaq Composite

dropped 1.1% to 2070.56.

Oil prices rose almost 4% on Thursday to $48.04, the highest since the end of November. Knocking on $50 a barrel again helped energy stocks.

Coal and oil topped the charts on the back of oil's strong advance while homebuilders benefited from lower interest rates and a positive outlook from

MDC Holdings

(MDC) - Get Report

issued after Wednesday's close.

Airlines, technology and pharmaceuticals were weaker.

Apple

(AAPL) - Get Report

rose 7% after its earnings blowout, but this did nothing for the rest of the sector. Higher oil prices obviously hit the airlines, and a Food and Drug Administration letter warning

Pfizer

(PFE) - Get Report

on its TV ads had drugs in a funk. Pfizer dropped 3%.

Drug companies also were expected to be big repatriators of foreign earnings, along with technology companies. The Treasury Department ruled that companies bringing cash back to the U.S. from abroad wouldn't qualify for the huge tax break if the money were used for dividends or stock buybacks. There was some evidence that the ruling hurt certain stocks:

Hewlett-Packard

(HPQ) - Get Report

, one of the biggest proponents of the tax cut and a company with almost $15 billion that could be brought home, fell about 2% in the late afternoon.

Beneath the surface, things didn't look quite as bad. Unlike almost every other day this year, the Nasdaq Composite actually had a higher low and a higher high than on Wednesday, and volume was less than on Wednesday's up day. A selling frenzy Friday morning could mark a bottom from the recent correction.

Then again, Richard Suttmeier, chief strategist at Joseph Stephens, warned that the Nasdaq had broken its major uptrend that began at the Aug. 13 low and ran through the Oct. 26 low. By closing below 2071, the Nasdaq now threatens to break its weekly uptrend that goes back to October 2002 -- the end of the three-year bear market. The level to watch is 1897. If the index drops through that line, look out below. (On a less dramatic note, the S&P 500 broke its simple 50-day moving average at 1187.)

In keeping with the day's -- and the year's -- action in the stock market, Morgan Stanley technical analyst Rick Bensignor issued his list of industries to underweight for the first quarter. The predicted weak sectors are commercial services and supplies, insurance, real estate and transportation.

Bensignor's fourth-quarter underweights mostly underperformed the market. The S&P 500 gained 8.7% in the fourth quarter while household and personal products gained 3.3%, food retailers gained 3.8% and commercial services and supplies gained 7.2%. The one missed call was tobacco, which outperformed and gained 12.2%.

The predictions have nothing to do with fundamental or macro factors. Commercial service is bouncing down to its 20-week moving average with several sell signals. Insurance is hitting several resistance points. Real estate has topped out at its 2002 high. The transports may make a mild pullback after being highly overbought.

Sifting Through the Data

In the world of macroeconomic indicators, many economists were looking to Thursday's report of December retail sales to clarify the state of the holiday shopping season and, by extension, the health and appetites of the U.S. consumer. They didn't have an easy task.

The headline number looked good, with retail sales overall rising 1.2% from November, the best performance since September. Much of that gain was due to auto sales: Not only were carmakers lavishing incentives on buyers, a huge depreciation tax break for small businesses expired at year-end. Minus autos, sales were up just 0.3%. Weakness appeared in falling month-over-month sales at electronics and clothing stores. Online sales were a bright spot as so-called nonstore retailers saw sales improve by almost 2%.

Still, the strength is sales over the course of the year was evident. The 12-month sales total was up 8% from 2003 and 9% excluding cars.

The slightly weaker-than-expected sales figure excluding autos was among several factors helping bonds rally. Weekly claims for unemployment insurance spiked up to 367,000 instead of declining as forecast. And import prices fell 1.3% in November. The data points suggested that the economy was not so hot and inflation was in check despite the declining dollar. The price of the benchmark 10-year Treasury note rose 17/32, its yield falling to 4.20%.

The import price report didn't look so hot for bonds below the surface, though. Excluding oil, prices rose 0.5% and the trailing 12-month gain was almost 4% excluding oil or 7% with crude in the mix.

The Treasury's auction of 10-year Treasury inflation protected securities also helped, showing that inflation expectations were falling. TIPS pay a fixed rate plus the return of the consumer price index. Thursday's issue was priced so that inflation would have to run at about 2.5% through 2015 to provide the same return as on a fixed-rate, ordinary 10-year note. The so-called break-even rate was down from 2.7% last month.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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