Dashing hopes that Friday's comeback signaled an end to a decline that began the day after Thanksgiving, major stock proxies fell sharply and steadily Monday. The Dow Jones Industrial Average shed 2% to 8473.41, finishing just a hair above its intraday low, hit late in the trading day. Following similar patterns, the S&P 500 shed 2.2% to 892 and the Nasdaq Composite lost 3.9% to 1367.10. Notably, each of the major averages violated support -- technical or psychological -- that had held repeatedly last week; specifically, Dow 8500, S&P 900 and Comp 1400. Trading volume was modest -- 1.24 billion shares were exchanged on the NYSE, 20% below the six-month moving average, according to Bloomberg. But there was little additional solace for those long shares, beyond hopes that the decline is getting long in the tooth. Those who see parallels between the post-Oct. 9 rally and the one beginning in late September 2001 observed last year's fourth-quarter rally peak on Dec. 6. The S&P 500 then fell more than 4% in the ensuing week before recovering in the final two weeks of December, peaking on Jan. 4 on a closing basis. The index then stumbled for the rest of January and into late February before rallying to within earshot of its January high on March 11, from which it proceeded to backtrack before coming unglued in mid-May. The post-Oct. 9 rally continues to follow a very similar track: Since peaking on Nov. 27, the S&P 500 is now down about 5%. One trader described Monday's setback as what "should have rationally" occurred on Friday following the abysmal employment report. "This is what should have happened Friday, but we rallied because of the O'Neill, Lindsey firings," he said. "I think they got a shot off
S&P 890 to get a firmer tape tomorrow. If they don't, we're screwed because I went out more long than short."
Following last Monday's intraday reversal, "typically what happens from such an inflection point is that you get a 5% to 7% downside correction before another rally attempt is due," Jeffrey Saut, chief equity strategist at Raymond James & Associates, observed early Monday. Before another rally attempt, he estimated such a decline should take the Dow to the 8441 to 822 range, where it is now ensconced. In the anticipated subsequent rally, "the Dow either betters last Monday's reaction high
of 9043 , signaling more upside, or it fails to do so, indicating a more serious correction" is forthcoming, he wrote. Friday's resignations of Treasury Secretary Paul O'Neill and White House economics adviser Lawrence Lindsey mean "the government is going to spend a lot of money in an attempt to stimulate the economy." The resignations also reinforced his view that there will be "no double-dip recession, a muted pickup in profits, a weaker dollar and a rise in the inflation rate." Monday morning, Bush named CSX ( CSX) chairman John Snow as the new Treasury secretary nominee. As chairman of the Business Roundtable and a former Ford administration staffer, Snow is perceived to have strong ties to Capitol Hill, and is a strong supporter of the Bush stimulus package, both attributes that were lacking in his predecessor. "O'Neill didn't have much following on the Hill, and a lot of Republicans disliked him because of his 'show business' remark" earlier this year about an ill-fated stimulus package passed by the House of Representatives, said Greg Valliere, managing director of Schwab's Washington research group. "Snow has a lot of support on the Hill and is a dynamic, persuasive guy." Meanwhile, Stephen Friedman, widely expected to be named as successor to outgoing economic policy adviser Lawrence Lindsey, has extensive Wall Street experience as former head of Goldman Sachs and current senior principal of Marsh & McLennan's private equity group.
"I don't think Snow or Friedman is going to be that involved in policy formulation," Valliere said, suggesting the "broad outlines of the stimulus package have already been settled upon by the White House." Rather, Snow and Friedman will be responsible for shepherding the policies through Capitol Hill and on Wall Street, respectively, as well as helping sell the plan to the American public, he said. On Monday, however, the Snow nomination did little to alleviate traders' concern about the course of the economy and the administration's policies. "Bush fumbled," said one money manager. "This guy ran a railroad whose stock has fallen on his watch, and he worked in the Ford administration when we had another recession. What's he going to do to fix the economy?" The source, whose firm prohibits him from speaking with reporters for attribution, suggested the market would have rallied had someone with closer ties to Wall Street, such as Citigroup ( C) Chairman Sandy Weill or NYSE Chairman Richard Grasso been named to lead the Treasury. But Schwab's Valliere countered that many Wall Street officials have a "pejorative image" because of recent scandals, and the White House "couldn't go in that direction." Indeed, one main drag on stock proxies today was weakness in Citigroup, which slid 3.8%, and J.P. Morgan ( JPM), which lost 4.8%, after
news reports suggested they each helped Enron hide debt before the energy trading firm's implosion late last year. The Philadelphia Stock Exchange/KBW Bank Index fell 2.1%. "I think the market got overbought, and we're still in a correction phase," he said, explaining Monday's weakness. "Plus, people are starting to focus more on Iraq. The U.S. is convinced there's deception in the Iraqi statement" issued this weekend about its weapons programs. (Meanwhile, crude futures rose 1% to $27.20 per barrel due mainly to concerns about the geopolitical situation in Venezuela, where 11 of 21 tankers owned by the state oil company were idled by a strike.)
Notably, the Treasury market rallied sharply Monday, with the price of the benchmark 10-year note rising 12/32 to 99 23/32, its yield falling to 4.03%. Had the financial markets really been focused on the Snow nomination, it's unlikely the Treasuries would have rallied so strongly. The Bush administration's support of more fiscal stimulus and tax cuts, which likely would increase the budget deficit and lead to more debt issuance by the government, are likely to be negative for Treasuries going forward. Instead, bond traders seemingly focused largely on weakness in the equity market and, specifically, some negative weekly sales data from retailers, such as Wal-Mart ( WMT) and Federated ( FD). The S&P Retail Index shed 2.5%. If there is a market-related angle to Snow's appointment, it's the impact on the greenback, Valliere said. "Snow comes from the Business Roundtable, where most people favor a weaker dollar because the strong dollar is hurting exports," he said. "It wouldn't shock me if the dollar weakened a bit because of the perception Snow comes from a background where that would be welcomed." The U.S. Dollar Index dipped 0.18 to 105.18.
filed for Chapter 11 bankruptcy , the largest in the aviation sector's history. While widely expected, the news put additional pressure on the beleaguered airline sector as the Amex Airline Index fell 4.8%, although the price of UAL shares was unchanged.