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SAN FRANCISCO -- Somebody call

Randy Newman

, because maybe the man who famously sang so dismissively about short people can explain why short weeks often prove so vexing for Wall Street.

Including this Memorial Day-shortened week, five of the last seven holiday weeks have seen stocks fall.

Large losses Wednesday drove the Big Three averages to a negative week for the first time since early April. For the week, the

Dow Jones Industrial Average

dipped 0.1%, the

S&P 500

lost 1.4% and the

Nasdaq Composite

shed 4.5%.

Profit warnings this week from (most prominently)

Sun Microsystems'

(SUNW) - Get Sunworks, Inc. Report


Radio Shack

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, and

PacifiCare Health


raised concerns, but market players

weren't terribly disturbed by the ensuing losses. Some considered the declines inevitable after the market's prior gains, while others noted many traders were absent (either literally or figuratively) during this short week.

Mainly, market participants weren't fazed by the declines because of their continued faith in the

Federal Reserve

. Renewed speculation that the Fed's easing cycle will continue -- and may include another 50 basis-point cut when the


next meets -- partially accounted for the market's modest gains Thursday and Friday. The Dow rose 0.7%, the S&P 500 gained 0.4% and the Comp climbed 1.9% on Friday, further aided by positive news from





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Yet economic data released throughout the week painted a mixed picture, raising questions about the future of monetary policy.

The week's big economic news was, of course, Friday's

employment report for May. The

Labor Department

reported a slightly larger-than-expected drop in nonfarm payrolls, but a surprising decline in the unemployment rate to 4.4% from 4.5%.

Average hourly earnings rose 0.3% to $14.26 in May, putting the year-over-year increase at 4.4%, the strongest in three years. The average hours worked index was unchanged at 151.5.

At first glance, the report -- along with upward revisions to both March and April's payroll figures -- indicated the deteriorating trend in jobs is abating. That, in turn, suggests the Fed may be less aggressive with future easing.

However, the overall pool of workers fell by 485,000 in May. Early retirement programs accounted for some of the decline, but economists caution it is mainly the result of workers giving up on looking for jobs -- for now. When those workers re-enter the pool, the unemployment rate will rise again.

Unlike the jobs report, the

National Association of Purchasing Management's

index of industrial activity contained little ambiguity. The NAPM index fell to 42.1 in May vs. 43.2 in April, confirming the latest month of steep losses in the manufacturing sector in the jobs report.

"On balance, there's no sign of recovery that I can see in any of these numbers, including the employment rate," said David Orr, chief capital markets economist at

First Union

in Charlotte, N.C. "If you look a the

jobs and NAPM numbers together, they're still showing the economy deteriorating

but possibly at a lesser rate, which argues for a 25 basis-point cut."

The bond market indicated its agreement with the notion of continued economic weakness; for the week, the yield on the 10-year Treasury fell 0.135 to 5.375%.

Still, other reports indicated the economy is on the mend, including a stronger-than-expected consumer confidence report Tuesday, a record construction-spending report for April, and an upward revision to retail sales released Friday.

"One way to paint the big picture is mixed signals and differing trends," Orr said. "I don't see recession as unavoidable or that we're in one now, by the standard the

National Bureau of Economic Research


The NBER, the official arbiter of such things, defines recession as "a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income and trade."


Economic Cycle Research Institute

has declared recession inevitable, if not

already under way, Orr noted. But "the positive yield curve and behavior of the stock market indicate the financial markets indicate a combination of Fed rate cuts and tax rebates will do the trick," and keep the economy out of recession, the economist said.

That, in turn, should lead to "positive profit growth of some magnitude" by the fourth quarter or first quarter of 2001, he continued, "which puts a floor under the broader market."


Separate, but clearly related to the issue of investors' ongoing faith in the Fed, are questions about the success of the Fed's rate-cutting so far, as

detailed here Thursday.

But Fed easing is having the desired and expected results, according to

Morgan Stanley

. Two weeks ago, I

reported on the firm's findings that traditional post-ease patterns had begun following the Fed's third rate cut on March 21. Specifically, those patterns entail stocks outperforming bonds, and growth stocks outperforming value.

The authors of the report argued investors should thus shift into groups such as retailers, software and services, diversified financials, media and leisure, while moving out of defensive groups such as utilities, basic materials, autos and energy.

Updated figures suggest those relationships continue to emerge.

From March 21 thru May 31, the top-performing sectors in the S&P 500 (gains in parentheses) are software and services (29%), media (25.2%), capital goods (22.2%), diversified financials (18.7%), and communication services and supplies (15.1%), Morgan reported.

The five-worst performing sectors are health-care equipment and services (3.3%), food and drug retailing (2.4%), automobiles and components (2.2%), tech hardware and equipment (1.7%), and household and personal products (0.5%).

Notably, every sector had positive returns while the S&P 500 itself rose 11.9% from March 21 thru May 31.

To optimists, those performance figures suggest the Fed's rate cuts are working just fine (

thank you very much

). They also explain why investors continue to put their faith in

Alan Greenspan

, this week's modest struggles notwithstanding.

One Good Call Deserves Another

For those with shorter time horizons then the above is designed to address, I submit the following:

Wednesday evening, Sam Ginzburg, senior managing director of equity trading at


, predicted stocks would soon enjoy a short-term trading bounce, led by tech.

With that call having come to fruition, I emailed Ginzburg on Friday afternoon to get an update.

"If stocks hold here and close strong, your best bet is to lighten up into most likely an up opening Monday morning," he replied. "Then one hour or so into the trading session I think you can start to short stocks for a trade only

and with tight stops."

Translation: He doesn't have a lot of faith in the market's ability to mount a sustained move near term, in either direction.

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.