There was a "material breach" Thursday, and not just in terms of Iraq's lack of compliance with its obligations, according to Secretary of State Colin Powell. The breach was in the stock market's ability to sustain an early rally, and presumably in traders' belief that good news from one tech firm can change the tone. Late Wednesday, there was much talk about how an upside surprise from Oracle ( ORCL) could ignite the much-awaited, still-elusive year-end rally. Oracle came through, delivering better-than-expected results and even some upbeat comments about its outlook. Oracle closed up 3%, but neither its news nor stronger-than-expected economic data could prevent major stock proxies from making appointed rounds with lower levels. The Dow Jones Industrial Average fell steadily after trading as high as 8505.26 early on, closing down 1% to 8354.80 vs. its intraday low of 8327.78. In similar fashion, the S&P 500 closed down 0.8% to 884.25 after having traded as high as 899.19 and as low as 880.32 at about 3:30 p.m. EST. The Nasdaq Composite slid 0.5% to 1354.10 vs. its earlier best of 1384.60 and nadir of 1346.20. At 1.36 billion shares, Big Board volume was up from recent levels but below its annual daily average for the 11th consecutive session. More than 1.4 billion shares traded over the counter, the first time that threshold has been exceeded since Dec. 6. As with Oracle, much of the news from big-cap names was tilted toward the positive. Dole Foods ( DOL) gained 14.5% after its CEO acquired the 76% of the company he didn't already own for a near 18% premium over the stock's close on Wednesday. Additionally, Goldman Sachs ( GS) and Lehman Brothers ( LEH) reported quarterly profits that exceeded consensus estimates and bested year-ago results. However, fellow brokerage Morgan Stanley ( LEH) saw its profitability fall 16% from year-ago levels. Shares of all three ended lower, and the Amex Broker/Dealer Index slid 1.4%.
On the macro front, the Index of Leading Economic Indicators rose 0.7% in November vs. 0.1% in October and expectations of 0.6%. Also, the Philadelphia Fed's regional manufacturing survey expanded by 7.2%, a second straight monthly gain, vs. forecasts for a rise of 5%. Weekly jobless claims declined, albeit less than was forecast, and the closely watched four-week moving average moved back above 400,000. None of those developments seemed to matter much to a market that has suddenly decided to fixate on prospects for war. In addition to Powell's comments, chief U.N. arms inspector Hans Blix expressed disappointment in Iraq's disclosure, saying "not much information about the weapons" of mass destruction is contained in Iraq's 12,000-page declaration. Meanwhile, various news outlets reported another 50,000 U.S. troops will soon be headed to the Persian Gulf, and CNN reported that the U.S. will decide by late January or early February whether or not to attack. Given Thursday's apparent market reaction to the war talk, I've got to give credit where it's due: All during the rally in late October and in November, UBS' Art Cashin frequently said on CNBC that the market would not (and need not) worry about war until later in the year. Why? Because the administration had a January/February timeline for starting the war, and nothing would deter them from that. That looks pretty spot-on now. For all the saber-rattling apparently unnerving traders, some observers believe Thursday's fall was simply a continuation of what RealMoney.com contributor Alan Farley called a "technically driven pullback," ongoing since Dec. 2 Just as the S&P 500 breached perceived support at 900 last Friday, today it dropped through the 890 level that some technicians have deemed significant. Meanwhile, the Comp closed below its 50-day moving average at 1361.20.
Notwithstanding gold's recent surge, a cottage industry of sorts has arisen as myriad market participants try to pinpoint reasons why a near-term top in the yellow metal is at hand. "The precious metal may soon lose its luster if this month's rally has nothing more to it than speculative fever," said Jes Black, currency analyst at M.G. Financial Group, the latest to join the gold-is-done parade. "A sustained rise above $350 could very well carry
gold to $420, a further 20% gain, but it's more likely that gold topped today." According to Black, the recent rise in gold was sparked largely by comments earlier this month by Fed Governor Ben Bernanke, who talked about the Fed's ability to print dollars (or the electronic version thereof) at will. "The logic for gold bugs is that with a deflationary threat now apparent, a reflationary response by the Fed, alongside increased government spending, will kick-start a new inflationary trend , thereby driving gold -- the ultimate inflation hedge -- higher," he wrote. "But this assumes reflation turns into inflation and dismisses the possibility that a weak economy will keep prices in a disinflationary trend." Evidence that financial markets don't fret inflation came from the fixed-income market Thursday, where the price of the benchmark 10-year Treasury note rose 25/32 to 100 16/32 Thursday, its yield falling to 3.94%. Gold is benefiting from geopolitical concerns and "the possibility of temporary reflation," due to rising oil prices, and both monetary and fiscal policies, Black argued. "While this is definitely bullish for the metal and bearish for the buck, gold will only truly shine in a nascent inflationary environment, and not until then." Meanwhile, Bridgewater Associates, which has over $30 billion in assets under management, issued a report Thursday showing that gold has "not been a good indicator of inflation" since 1982, judging by its relationship to the consumer price index. Gold's rise has mainly been due to private investment demand from, most prominently, Japan, China and Turkey, as well as from gold producers scaling back their hedging activity, according to Bridgewater. "On balance, the picture for gold is much less bullish than it was before the shorts covered," the report concludes. Hard to argue with that logic. Nevertheless, gold continues to climb the proverbial wall of worry, which seems particularly steep and crowded in this case.