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What a Week: Bonds Have Less Fun

Rising yields threaten equities' advance in a market that is still range-bound.

The always-present battle between fear and greed took center stage on Wall Street this week, with fear winning out by a small margin in equities but by a rather large amount in Treasuries.

In keeping with recent trends, fixed-income markets experienced far more drama than their equity counterparts. Amid largely positive economic news and rumors of distressed sellers in the mortgage-backed community, there were some wild intraday and day-to-day moves in Treasuries, mainly to the downside. Late Friday, the yield on the benchmark 10-year note was at 4.40%, down sharply from its intraday high near 4.60% but still up 21 basis points for the week.

Concerns about rising yields scuttling the economic recovery -- the Mortgage Bankers Association reported Wednesday that mortgage applications dropped 24.3% in the past week while refinancing tumbled 33% to its lowest level in a year -- and Treasuries providing stiffer competition contributed to weakness among major averages. For the week, the

Dow Jones Industrial Average

fell 1.4%, the

S&P 500

shed 1.9% and the

Nasdaq Composite

lost 0.9%.

"If rates rise before the economy starts to pick up, they damage the recovery before it gets started," Ethan Harris, senior economist at Lehman Brothers, opined Friday. "The quick rate rise is also troubling because the U.S. economy appears to be unusually vulnerable to higher interest rates?consumers have been on a low-rate debt binge."

Steve Massocca, president of Pacific Growth Equities in San Francisco, said rising Treasury yields removes "one leg of the stool" previously supporting equities. Specifically, even if stocks weren't absolutely cheap, valuations were attractive relative to Treasuries, he said; prior to the recent surge in yields, that is. "It's not that absolute

yield levels are particularly bad, it's that yields are in motion," Massocca continued. "If

the 10-year's yield hangs here, people will get comfortable with it. But if it creeps up above 4.50% or 4.60%, then people will think 'where does it stop?'"

Rising consternation over the fixed-income market's machinations notwithstanding, this week was essentially a mirror image of

last week, when major averages bounced at important support levels. Conversely, this week was characterized by the inability of shares to advance beyond closely watched resistance levels despite largely positive news. That failure was embodied by Thursday's session, when major averages surrendered the bulk of early gains generated in the wake of better-than-expected reports on second-quarter GDP, Midwest manufacturing and weekly jobless claims.

Round-Tripping Within the Range

After the S&P failed to break through resistance at 1005 or to close above 1000, major averages proved susceptible to Friday's less upbeat economic news. Most notably, nonfarm payrolls fell 44,000 in July vs. expectations for a rise of between 10,000 and 25,000. The unemployment rate unexpectedly fell to 6.2% from 6.4%, but that was overshadowed by the job losses and rise in temporary workers, suggesting continued slack in the labor markets.

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Also Friday, the Institute for Supply Management's national manufacturing index rose to 51.8, above the key 50 level for the first time since February, but below consensus expectations of 52 and even higher "whisper numbers" generated by Thursday's Chicago PMI data.

Elsewhere, June personal spending rose 0.3%, a bit shy of expectations, while June construction spending was flat vs. expectations of a 0.4% rise. At 90.9, the University of Michigan consumer sentiment index was above expectations, countering a surprising slide in the Conference Board's survey on Tuesday. Meanwhile, the Economic Cycle Research Institute reported its weekly leading index dipped to 127.2 from 127.3; however, the index's growth rate (a four-week moving average) rose to a 20-year high of 11.5%.

Amid that deluge of data and in the aftermath of Thursday's late swoon, major averages spent most of Friday in retreat, with the Dow falling 0.9% to 9153.97, the S&P losing 1% to 980.15 and the Comp off 1.1% to 1715.62.

So after approaching the high end of its recent trading range Thursday, the S&P 500 approached the lower end of its range at 970 on Friday, closing below its simple 50-day moving average of around 985. The Dow and Comp settled below their respective 20-day moving averages of 9164.32 and 1725.16 but above their 50-days. All proxies remain well above their 200-day moving averages.

Technically speaking then, the intermediate-term upturn for major averages remains intact but appears vulnerable in the short-term. Then again, that's largely been the case for the past six or seven weeks. Some resolution of the recent range-bound action may be forthcoming but this week again proved frustrating to those making big bets in either direction.

Speaking of bets, Brad Ruderman, managing partner at Los Angeles-based Ruderman Capital Partners, noted that bigger-cap tech stocks, save Internet favorites, continued to perform strongly this week despite myriad prophecies of their demise. The

Merrill Lynch Semiconductor Holders





hit 52-week highs this week, he noted. (Ruderman's $150 million hedge fund is long Cisco.)

"For all those expecting rotation out of tech into heavy cyclicals, it doesn't look like that's necessarily the case," he said.

Instead, investors are rotating out of areas that "typically don't do well in a booming economy," he continued. Examples include large-cap pharmaceuticals and related names such as

Cardinal Health


as well as utilities.

Ruderman suggested that augurs favorably for the economy and stock proxies, noting many expected the "carnage in bonds" would have led to even greater weakness in equities. While maintaining a "long bias" toward shares, he's worried "if the bond market turns into a fiasco, there will be a price to pay."

That is, a bigger price than the relative token amount extracted this week.

Tune-In TaskMaster

I'll be back on WABC radio's Batchelor & Alexander show Friday night, around 9:15 p.m. PDT/12:15 a.m. EDT (i.e. Saturday morning for East Coasters.)

The show is nationally syndicated, so check for local listings or Webcast options.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.