The problem with the "year-end rally" scenario isn't that so many market participants are expecting it. Rather, the problem is that corporate news does not support an advance, especially from current valuation levels.

That truth was self-evident early Wednesday as stock proxies were waylaid by a much-wider-than-expected loss from Micron Technology ( MU), lackluster results from FedEx ( FDX), warnings by Activision ( ATVI) and Blockbuster ( BBI), and Bank of New York ( BK) announcing it will set aside $390 million to cover losses from aircraft lease contracts with UAL ( UAL). Also, Conseco ( CNC) submitted the third-largest bankruptcy filing in U.S. history.

As of 2:18 p.m. EST, the Dow Jones Industrial Average was down 0.7% to 8475.72, although off its earlier low of 8407.72. Similarly, the S&P 500 was lower by 1% to 894.16 after having traded as low as 887.82. The Nasdaq Composite was down 1.9% to 1365.45 vs. its nadir of 1355.60.

Confirmation that Halliburton ( HAL) will settle its asbestos claims coincided with a late-morning rebound for blue-chip proxies. But the bounce was short-lived, and Halliburton was only fractionally higher after being reopened for trading.

The Comp was relatively weak, largely because of weakness in semiconductor stocks in the wake of Micron's miss. The Philadelphia Stock Exchange Semiconductor Index was lately off 6.3%.

Meanwhile, the belligerent rhetoric from the White House was intensifying, heightening concerns about the onset of war with Iraq. The U.S. is expected to formally reply to Iraq's weapons declaration shortly, and President Bush is "concerned about omissions in the declaration," White House spokesman Ari Fleischer said Wednesday. Those comments caused a resumption of the "war premium" being priced into oil and gold prices, with the former lately up 1.2% to $30.45 and the latter up by 1.4% to $342.70.

That puts gold at its highest level since June 1997. Nevertheless, many traders continue to muse over whether the metal has peaked, at least in the near term.

"Our comments Monday reflected our skepticism that the rise in gold was due specifically to the prospects of war," commented Jeffrey deGraaf, senior technical analyst at Lehman Brothers. "The technical perspective indicates something far more structural or secular because the rally in gold has been under way long before the events of Sept. 11, 2001, or the most recent tensions with Iraq."

DeGraaf, who made a well-timed "sell" call on equities last Thursday , is bullish on gold's long-term prospects. The strength in gold and weakness in the dollar during a time of global geopolitical unrest indicate that "the supply/demand dynamic has changed," or at least that the greenback's "safe-haven" status is diminishing, he wrote. The U.S. Dollar Index was lately up 0.22 to 104.22, aided by a larger-than-expected narrowing of the trade deficit to $35.07 billion in October, from $38 billion in September and August's record high of $38.09 billion.

However, the technician is concerned about gold's short-term outlook, citing the Commodity Futures Trading Commissions commitment-of-traders report for gold.

As of Dec. 10, the net position of commercial hedgers was short by nearly 91,000 contracts, and they had increased their short positions and decreased longs from the previous week. Conversely, speculators, or "non-commercials," had increased their short positions by more than 24,600 contracts from the week ended Dec. 3 and were net long by 51,359 contracts. (The term "commercial hedgers" refers to companies that take positions in commodity futures to lock in prices for raw materials they need for manufacturing, or to hedge their own production of those commodities. Speculators, or non-commercials, are typically momentum types who follow technical trends.)

"The fact commercials are net short means they're not finding value at $340-ounce" gold, deGraaf said. "Historically, commercials are long at lows and short at highs, and speculators are the opposite."

Gold's long-term chart "is as bullish as any chart we see in this market, but we suspect the short-term picture has been tarnished," he suggested. "The short-term picture probably gets choppy from here, and buying on weakness looks like the better call."

Thus far, however, many traders continue to buy into gold's ongoing strength.

Volume Spike a-Coming?

As has been the case for some time now, volume was modest on Wednesday. With 965 million shares exchanged as of 2:30 p.m. EST, Big Board volume was on track for a 10th consecutive session below its annual daily average of about 1.45 billion shares.

But history suggests this string of low-volume sessions should end shortly, according to Rainsford Yang of Astrikos.com, a Web site dedicated to market timing.

In each of the past 12 years, there has been a large spike in volume in December after the 15th of the month, Yang reported. Typically, the spikes were about 40% above the 20-day average, which is currently around 1.4 billion shares.

If the pattern holds, a session approaching (or exceeding) 1.8 billion shares on the Big Board should occur shortly and "coincide with a big move in the market," he added.

For some time now, bulls have argued that the low volume accompanying the decline means that buyers have merely stepped aside and are building cash positions and biding time before re-entering. Conversely, skeptics contend that the low-volume sell-off is merely a precursor to a high-volume sell-off, which will occur when more market players give up on hopes for a year-end rally.

If Yang is right, we should have a resolution shortly, and he, for one, is betting on a bullish outcome.
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.