A little decline here, a little setback there and, suddenly, you're talking about something serious. Such was the attitude Tuesday as the market's third-consecutive decline -- its biggest of the three -- generated discussion that the post-Oct. 9 rally may have ended. After trading as low as 8721.88 at about 12:30 p.m. EST, the Dow Jones Industrial Average closed down 1.3% to 8742.93. The S&P 500 shed 1.5% to 920.75 and the Nasdaq Composite lost 2.4% to 1448.96. Presumptive catalysts for the decline were some cautious comments from AOL Time Warner ( AOL), which fell 14.2%, and Nokia ( NOK), which lost 4.6%. Weak November sales data from Ford ( F) and General Motors ( GM) weighed on the automakers' shares, as well as traders' perception about the strength of consumer spending and the economy. Also contributing to the decline was a prevailing sense of foreboding. Many market participants sense that Monday's intraday highs of 9043 for the Dow, 954 for the S&P and 1521 for the Comp will prove to be the peaks of the post-October rally. Just one day after those peaks, technically inclined traders, such as RealMoney.com contributor James DePorre, are talking about the S&P having breached its Nov. 6 high of 925 and now facing a possible retest of support at 900. The market's propensity to accentuate the negative was further evinced in the strange case of Merck ( MRK), which traded as low as $55.16 before closing off 1.7% to $58.91. The decline began when Merck said it would have a conference call on Thursday in advance of its Dec. 10 scheduled analyst day. That news spurred concern Merck would warn, prompting a downgrade from Merrill Lynch to sell from buy. The resulting decline and scuttlebutt prompted Merck to issue a subsequent announcement reiterating its earnings guidance for the fourth quarter and 2003, which helped the shares recover from the intraday low. Meanwhile, the same Merrill analyst upped his recommendation to neutral.
The value (or lack thereof) of the Merrill calls notwithstanding, the Merck saga demonstrated how apt traders are to sell shares following the market's robust eight-week rally. Notably, some of the best performers since the Oct. 9 lows were among Tuesday's biggest percentage leaders. The Philadelphia Stock Exchange Semiconductor Index shed 5.2% and the Nasdaq Telecom Index lost 3.7%. While understandable, the "sell now, ask questions later" mentality runs counter to the skeptics' lament that market participants have become wildly bullish. Certainly, sentiment indicators such as the CBOE Market Volatility Index suggest negativity has fallen sharply in the past two months, but perhaps optimism isn't as rampant as some presume. (On Tuesday, the VIX rose 5.7% to 31.76.) The lack of runaway bullishness was further evoked by the market's apparent concern about comments Tuesday by Richard Bernstein, chief U.S. Strategist at Merrill Lynch. Citing a longstanding target of 860 for the S&P 500, Bernstein lowered his recommended equity allocation to 45% from 50%, raised bonds to 35% from 30%, and kept cash at 20%. "The equity market still appears highly speculative to us," Bernstein wrote. "Such speculation is typically indicative of the end of a market cycle, and not the beginning of a major bull market." Bernstein is certainly well respected and his opinions worth heeding. But the Merrill strategist has long been the most bearish of the so-called major strategists and, thus, Tuesday's comments shouldn't have been terribly surprising to anyone who's been paying attention. The fact Bernstein's comments were partially responsible for the market's slide means either traders are looking for an excuse to sell or news outlets had no better explanation for the decline. Of course, it's entirely possible that the market did peak early Monday and that at least the first part of December will prove cruel to those long stocks. But Tuesday's mood suggests that bearish scenario is starting to gain credence on Wall Street, and the market often has a way of doing what is least expected of it. Notably, while stocks tumbled Tuesday, demand for Treasuries was modest. The price of the benchmark 10-year note rose 6/32 to 98 11/32, its yield falling to 4.20%.
reported previously, the sell-side indicator is a measure of Wall Street strategists' relative bullishness, and has been a reliable contrary indicator in recent years. The November data suggest that Wall Street strategists remain very bullish on a historic basis but have ratcheted down their enthusiasm ever so slightly.