Throughout the market's now five-week rally, skeptics charged it was all hat and no cattle; that is, not supported by fundamental developments. Prior to the opening bell this morning, fundamental support was delivered in the form of a robust durable goods number and optimists ran with it; that is, until the 10 a.m. EDT release of a weaker-than-expected consumer confidence report.

As of 2:20 p.m. EDT, the Dow Jones Industrial Average was down 0.5% to 8878.16. The S&P 500 was lower by 0.9% to 939.48 after having traded as high as 946.05 and the Nasdaq Composite was off 2.2% to 1361.24, against an earlier best of 1365.62.

The early gains followed the government report that orders for durable goods rose a stunning 8.7% in July vs. a consensus estimate for a gain of 1.4% and compared with a 4.5% decline in June (revised down from a drop of 4.1% originally). Excluding transportation, orders rose 3.9% last month, matching the decline in June.

Capital goods orders, excluding defense, jumped 13.5% last month, indicating an improvement in corporate spending after a decline of 9.6% in June. Excluding defense and aircraft, capital goods still rose a solid 8.1% vs. a fall of 6.3% in June.

When the weak durable goods report for June was released on July 25 , many observers dismissed it, citing the "notorious volatility" of the number. Not to be curmudgeonly, but I didn't hear a lot of similar comments this morning. More often, it seemed, the quite strong report for July was cited as "proof" the double-dip dragon had been slain.

But "volatility is a way of life for durable goods orders," said John Silvia, chief economist at Wachovia Securities. To account for this, he cited the lack of leading releases to help economists predict the durable goods report, the "lumpy" nature of orders for aircraft and defense goods, and "seasonal-adjustment problems."

For the past three months, durable goods orders excluding transportation were up 5.9% but are down 3.5% on a year-over-year basis, Silvia observed. "Momentum is on the upside but we continue to walk that line between boom and double dip," he concluded, expressing a centrist view that runs counter to the current penchant of many to see things only in extremes. That is to say, we shouldn't get too excited over today's strong data, just as we shouldn't have been overly depressed by the June weakness.

But, of course, financial markets have a way of reacting dramatically to daily events. Equities rallied following the durable goods report while Treasuries slumped amid speculation the strong data might reduce the likelihood of a Federal Reserve rate cut. Then came the Conference Board's consumer confidence report for August, which showed an unexpectedly large decline to 93.5, a nine-month low and vs. 97.4 in July (upped from 97.1 previously).

A Merrill Lynch downgrade of several retailers, including Dollar Tree ( DLTR) and Nordstrom ( JWN) to sell, raised concerns about the sector and the outlook for consumer spending, which the consumer confidence data redoubled. That, in turn, weighed on equities and the dollar, while summarily helping Treasuries recover from their early slide. Of late, the Dollar Index was down 1.06 to 106.89 while the benchmark 10-year note was down 12/32 to 100 27/32, its yield rising to 4.27%.

Other macro developments hampering stocks and the dollar today included renewed strength in crude and gold prices, amid heightened anticipation of imminent U.S. action against Iraq. Additionally, the Congressional Budget Office confirmed its estimate of the fiscal deficit to $157 billion for the fiscal year ending Sept. 30, and forecast a $145 billion deficit for fiscal 2003.

The government's budget won't return to a surplus until 2006, the CBO said, slashing its forecast for the cumulative surplus for 2002 to 2011 to $336 billion from $1.7 trillion in March, and more than $5.6 trillion last year.

Stocks also were reacting to some cautious comments by Intel ( INTC) CEO Craig Barrett, who said "companies are not investing" in computer equipment and that he was not confident the holiday season would provide a boon to the PC industry this year. Intel was lately off 4.7%, dragging the Philadelphia Stock Exchange Semiconductor Index down 4.5%.

Additionally, HealthSouth ( HRC) was down 47.1% after reducing its earnings guidance and announcing plans to spin off its surgery care unit; the firm cited government reimbursement changes for both developments. Separately, Toll Brothers ( TOL) was down 1.2%; the homebuilder posted better-than-expected third-quarter earnings of 70 cents per share, but that was down 10% from year-ago levels as its revenue fell 1%.

Denouement

Having written all that, the bottom line is major averages weren't suffering huge declines as of this writing and afternoons have been kind to shares lately, in case you hadn't noticed. But, as noted above, market participants tend to see things in black and white these days, and the most predominant color thus far today was red.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.