A seemingly never-ending string of negatives finally caught up with major averages Thursday, but the damage was short-lived, as the final hour of trading once again proved kind to shares. Revelations of fraud at Guidant ( GDT), indictments of former Dynegy ( DYN) accountants, simmering concerns about Freddie Mac ( FRE) and another rise in jobless claims conspired to send stock proxies down from their early highs. But widespread selling never materialized, and buyers rushed in late in the day for the fourth straight session. After trading as high as 9236.11 before 10 a.m. EDT, the Dow Jones Industrial Average declined sharply thereafter amid rumors of a large sell program from an overseas investor. The index hit what would prove to be its intraday low of 9116.86 at around 10:30 a.m., then meandered in a tight range until around 3:30 p.m., after which it rallied sharply, ending up 0.1% to 9196.55. Following similar patterns, the S&P 500 closed up 0.1% to 998.51 after trading as high as 1002.74 and as low as 991.27, while the Nasdaq Composite ended up 0.5% to 1653.62 vs. its best of 1661.10 and a nadir of 1640.10. Volume was modest relative to recent action, with 1.4 billion shares traded on the Big Board and 1.7 billion in over-the-counter activity. Advancing stocks bested decliners by slim margins in both. Technically speaking, it's notable that the S&P faltered after trading above 1000 intraday, as was the case last Friday. The 1000 level had been cited by some as a potential resistance point for the index, after it broke through prior resistance in the 965-970 level. Recent history has shown that all such levels eventually are surpassed, and resistance gets weaker every time it's tested. Still, S&P 1000 will remain a closely watched level by followers of technical analysis. I focus on technicals to explain the intraday action, because fundamental developments such as economic data didn't seem to be holding sway. Shares burst higher at the open, despite a higher-than-expected rise in weekly jobless claims and a jump in continuing claims to the highest level since April 1983. Adding insult to injury, jobless claims for the prior week were revised higher.
Some optimists were inspired by May retail sales, which rose 0.1%, reversing a 0.3% decline in April. Excluding autos, retail sales rose 0.1%, a bit weaker than expected. But "the bottom line is that the much-anticipated postwar bounce in spending remains elusive," according to David Rosenberg, chief North American economist at Merrill Lynch. "We will have to wait to see how the coming wave of tax relief and mortgage refinancing will influence the consumer" in the third quarter. Meanwhile, April business inventories rose a weaker-than-expected 0.1%, and May import prices fell 0.3% and by 0.2% excluding oil, despite a weaker dollar. Rosenberg dubbed the data "bond friendly," meaning it represented evidence of continued sluggish growth and deflationary pressures. Indeed, the price of the benchmark 10-year Treasury rose 13/32 to 103 29/32, its yield falling to 3.16%, yet another new low for the current cycle. Treasuries were also buoyed by ongoing concerns about Freddie Mac, a huge participant in the mortgage-backed securities market. Spreads on Freddie Mac 10-year paper widened to 38.5 basis points above comparable Treasuries intraday Wednesday, according to Miller Tabak. That's the widest since Monday's announcement of a shake-up in the firm's management suite. Freddie Mac shares fell 5.5% Wednesday, although broader equity markets seemed more concerned about newer revelations regarding Guidant, which fell 5.7% after the company pleaded guilty to 10 felony counts. To date, stock proxies seem inoculated to evolving developments of the government-sponsored entity, although Treasury Secretary John Snow requested more disclosure from and tighter regulatory scrutiny of both Freddie and Fannie Mae ( FNM), which fell 3.6%. More than a few traders observed that shares initially brushed off concerns about Enron in a fashion similar to the way they're currently handling the Freddie affair, although the fixed-income market was quicker to react to the Enron scandal. Stay tuned.
Richard Russell, editor and publisher of Dow Theory Letters, has been particularly skeptical about stocks in general and the recent rally in particular, as reported
here and more recently by RealMoney.com contributor Bill Fleckenstein. ("Fleck", a bear's bear, has cited Russell's work five times since early April, and that speaks volumes about how bearish the newsletter writer has been.) Given that, it's notable that Russell's most recent newsletter begins with an acknowledgment that the Dow's June 4 close above its November peak "confirmed" the Dow Jones Transportation Average's earlier rise above its January peak. Such action is bullish under Dow Theory, about which Russell is considered the dean. However -- and here's where the "sort of" part comes in -- immediately after reporting on this confirmation, Russell warned readers: "Remember, this is a rally in a bear market." Reiterating a previous forecast, Russell forecast the Dow will trade as low as 3000 (yes, 3000) before this secular bear move ends. "I continue to see this advance as a rally or correction in an ongoing bear market which can be violent and spectacular," he wrote. "The ultimate bear market bottom lies in the future." The recent Dow Theory buy signal notwithstanding, he's sticking with a bearish view, because "every bull market in history has started from a base of stocks at great values ... characterized by low price/earnings ratios and high dividend yields." Neither was present at the lows in October 2003 or March 2002, he observed, nor are they present today. Russell recommends using tight stops on long equity positions, and sticking with "income-producing investments" such as municipal bonds, utilities and other high-dividend yielding stocks, as well as gold and related shares. (Regarding the latter, the gold column referenced here last night is scheduled for Friday morning.) In sum, those worried about towel-tossing by bears as a contrarian signal of the market's peak can take solace in Russell's grizzled, and grizzly, outlook.