Market Refuses to Give Up Gains Easily

After drifting solidly lower for much of the trading day, stock proxies rebounded Monday afternoon. The late rally wasn't nearly as powerful as the one evident last Wednesday, but it did help major proxies end well off intraday lows.

The Dow Jones Industrial Average closed down 0.7% to 8688.89 vs. its earlier low of 8582.01, while the S&P 500 ended down 0.5% to 903.80 vs. its nadir of 892.33. The Nasdaq Composite, meanwhile, closed up fractionally to 1306.84 after having traded as low as 1286.91.

Given last week's big gains for major averages, Monday's losses shouldn't come as a big surprise. Catalysts cited for the weakness included the bankruptcy filing of US Airways ( U) and weakness in Applied Materials ( AMAT) following a critical article in Barron's Sunday and a Prudential Securities estimate cut Monday.

Meanwhile, renewed weakness in Brazil's financial markets took some of the recently polished shine off money-center banks such as J.P. Morgan ( JPM) and FleetBoston Financial ( FBF). The Philadelphia Stock Exchange/KBW Bank Index fell 0.9%.

Then there's the rising acceptance that the Federal Reserve will not lower rates at Tuesday's policy meeting, a factor that was weighing on the dollar as well as on stocks. The Dollar Index settled down 0.81 to 107.62.

Still, optimistic market watchers were encouraged by the market's "resilience" after its early weakness. Then again, maybe it really was just a "nothing" day, a typical summer Monday, given the lackluster volume. Just over 1 billion shares were exchange in NYSE trading, the lowest full-day session since May 28, while just 941.4 million traded in over-the-counter activity.

The 'All Hands' Team

Cynics, and I'm talking about the hard-core types here, observed that the averages' afternoon advance coincided with (and followed) newswire reports of comments from White House spokesman Todd McClellan, who declared: "We are on a path to sustained economic growth."

Ahead of the president's "Economic Forum" in Waco, Texas, on Tuesday, a cynical observer might surmise that the government used its powers of persuasion/manipulation to keep market proxies from suffering bigger losses. Having learned the hard way, the Bush administration is now taking pains to ensure that stocks rally -- or at least don't plummet -- while its officials are speaking, or so the theory goes.

As I have written previously, almost more important than whether or not such theories hold water -- there's a lot of leakage, for sure, and few on Wall Street believe such an endeavor could be kept secret -- is the growing perception that they do. More and more investors believe the game is rigged, and even if it's currently being rigged for their benefit, some are fed up and are taking their proverbial ball and going home, as recent mutual fund outflows suggest.

On the other hand, conspiracy theorists should contemplate the long-held view that the so-called smart money is most active in the afternoon rather than the morning. The implication being that maybe these late-afternoon advances are signs the so-called sophisticated, institutional investor is becoming more enamored with equities, especially on intraday dips.

History: A Riddle and a Rhyme

Having said that, a breakdown of today's sector strengths and weakness recalls a point made this morning by Thomas McManus, equity portfolio strategist at Banc of America Securities.

Recalling that today marks the 20th anniversary of the stock market's historic bottom in 1982, McManus observed some stark differences between now and then.

Following the August 1982 bottom, economically sensitive stocks -- which had been underperforming stable growth stocks by a wide margin in the 18 months previous -- got a "huge lift as stocks and the economy recovered," he recalled. In the ensuing 18 months, cyclical stocks doubled while the "stable growth" stocks rose a more modest 60%.

By contrast, "the rotation in today's market seems to be away from recovery beneficiaries and toward the more defensive sectors, such as consumer staples and health care," McManus observed. "The biggest disappointments appear to be coming from the consumer discretionary sector ... in particular, retailing stocks which were among the best to own after 1982's bottom."

Today, the Amex Drug Index rose 0.4% while the S&P Retail Index slid 2.3%, thanks to a series of weak same-store-sales reports and resulting weakness in individual names such as Limited ( LTD), Federated ( FD), Kohl's ( KSS) and Dow component Home Depot ( HD).

Elsewhere, defensive groups such as utilities rallied -- the Dow Jones Utility Average gaining 1.4% -- while the Morgan Stanley Cyclical Index fell 1.3%. The Philadelphia Stock Exchange Oil Service Index rose 2.5%, but that economically sensitive sector's advance was attributed to geopolitical developments in Colombia and Iraq rather than expectations of faster growth. (As reported earlier, Morgan Stanley global economist Stephen Roach lowered his growth forecast for the U.S. to 2.3% from 2.9% for 2002 today and to 3.1% from 3.8% for 2003. Similarly, he lowered the global growth forecast to 2.5% from 2.8% for 2002 and to 3.4% from 4% for next year.)

Of course, there's a lot of differences between how various groups have performed in recent months vs. how they performed prior to the Aug. 1982 bottom. McManus maintains "an open mind about the possibility that the late July lows might mark a bottom for this market cycle" but considers that possibility unlikely, given the differences in what occurred prior to recent lows and what's transpired since, today included.

Tune In Taskmaster

I'll be back on WABC radio's "Batchelor & Alexander" show tonight at about midnight EDT and 9 p.m. PST. Do tune in or check out WABC's Web site for Webcasting information.

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.

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