There was plenty to worry about this week, and a variety of issues, fundamental and technical, kept a lid on shares.

For the week, the Dow Jones Industrial Average rose 0.6% and the S&P 500 gained less than 0.1%. But the Nasdaq Composite fell fractionally as Friday's losses wiped out its weekly advance.

Looking at the bulk of corporate news this week as well as the economic data, along with the escalation of violence in the Middle East, it's hard not to reach a bearish conclusion. However, stocks were largely able to shake off myriad negatives amid notably moderate trading volumes.

On Friday, for example, just 1.2 billion shares traded on the NYSE and 1.8 billion in over-the-counter activity. Volume was down from recent levels throughout the week, with the Big Board consistently under 1.5 billion shares and Nasdaq never exceeding 2 billion, as it had several times the previous week.

Optimists will take solace that volume was down as the market hesitated, as it indicates few traders are rushing for the exits. Furthermore, the market's overall resilience to negative news and traders' repeated proclivity to buy intraday dips are characteristics of bull market activity. Notably, major averages were often strongest late in trading days, when the so-called smart money is believed to be most active.

In retrospect, however, perhaps last Friday's nearly 3 billion-share over-the-counter session represented the peak of momentum, at least near term. Although the Dow exceed its June 6 high of 9215.88 intraday Thursday, it failed to sustain itself above 9200, and neither the S&P or Comp exceeded their respective June 6 intraday highs of 1007.63 and 1684.06 this week.

Notably, the Amex Biotech Index fell 2.8% this week, while the Philadelphia Stock Exchange Semiconductor Index lost 7% and Internet Index shed 2.8%. Among recent standouts, only the homebuilders sustained the recent momentum, with the S&P Homebuilding Index up another 5.7% this week.

Homebuilders aside, "I think you are looking at forward momentum being taken out of the equation," said John Brooks, senior strategist at Lowry's Reports. "The long-term indicators are all pointing higher but the short-term stuff is giving everyone agita."

In addition to shares being technically overbought and momentum indicators starting to roll over, Brooks observed the rate of gain in Lowry's buying power index is starting to slow, even though it made a new cycle high this week.

"It doesn't look like the market is going to fall apart but it's having a hard time sustaining itself above Dow 9000," he said. It's not that technical indicators are outright negative, but they're less positive than they have been recently, the veteran technician said. He compared the market to both a balloon that stays afloat only as long as air is constantly being pumped into it, and to Caesar's wife, in that it cannot make any mistakes.

In March, technical glitches could be overcome because the market was so oversold and valuations were relatively more attractive, Brooks continued. "Here, it's a different game. Everything has to be cooking on all cylinders, but they're not."

Brooks recommended awaiting further weakness before committing new capital and/or using this time to "upgrade portfolios." To him, that essentially means moving out of smaller-cap stock and into bigger-caps, especially higher-yielding names.

"Going forward, yield is going to be an important element to any stock market opinion," he said, suggesting the recent cut in dividend taxes is gravy in the broader trend toward income-producing assets. "The psyche of the Street is going to have to adapt to that whether they want it or not."

Fretting Freddie

Speaking of yield, the rally in Treasuries continued this week amid another string of desultory economic data, including the highest level of continuing jobless claims since April 1983, lackluster retail sales data, falling import prices and weaker-than-expected business inventories. On Friday, the Economic Cycle Research Institute reported its weekly leading index fell to 123.2 from 123.6 the prior week. The index's four-week moving average did rise to 5.5% from 5.2%.

"The good news is there is no new recession imminent," Lakshman Achuthan, ECRI managing director, said in a statement. "However, the pace of growth is unlikely to generate many jobs."

Such concerns contributed to rising expectations for a 50-basis-point rate cut from the Federal Reserve this month. The price of the benchmark 10-year note rose 15/32 to 104 12/32 Friday, its yield falling to 3.11%, another new low for the cycle. The 10-year's yield fell 24 basis points for the week.

Treasuries also benefited from a "flight to safety" trade amid concerns about Freddie Mac ( FRE), which announced a shake-up in its management team on Monday. That was soon followed by federal investigations into its accounting practices and calls for heightened regulatory scrutiny of the mortgage guarantor and its fellow government-sponsored enterprise, Fannie Mae ( FNM). For the week, Freddie Mac shares fell 15.5% and Fannie lost 8.1%, despite each rallying Friday. Spreads of Freddie Mac's bonds widened sharply vs. comparable Treasuries as the simmering scandal unfurled.

Freddie Mac dominated headlines, because it is so big that it poses risks to the entire financial system; too big to fail that is, which means it poses risks to American taxpayers. But Freddie was far from the only issue weighing on financial markets this week.

Shares declined sharply early Friday after weaker-than-expected reports on producer prices and consumer confidence by the University of Michigan, as well as lowered sales guidance from Adobe Systems ( ADBE). But as occurred every day this week, major averages rallied in the afternoon and the downturn was limited. After trading as low as 9074.08, the Dow closed off a relatively modest 0.9% to 9111.12 while the S&P 500 finished off 1% to 988.61 vs. its nadir of 984.27. Reflecting its relative weakness for the week, the Comp shed 1.6% to 1626.49 Friday, ending just off its worst of 1624.10.

Adobe joined a string of big-cap tech names to warn or provided squishy guidance this week. Others included Texas Instruments ( TXN), Nokia ( NOK), and Motorola ( MOT).

Thanks to positive comments by Micron Technology ( MU) and Merrill Lynch's defense of IBM ( IBM), momentum investors were largely able to slough off the negative tech news. Similarly, broader activity was mainly strong despite revelations of fraud at Guidant ( GDT) and disappointing results from firms such as Winnebago Industries ( WGO).

In other markets, gold prices fell 1.6% for the week to $357.20 per ounce. Crude futures slid 2% to $30.65 per barrel thanks to a big rally Friday, after the International Energy Agency made an unprecedented 79 million-barrel upward revision to its oil inventory data for March. The dollar weakened anew, falling to 117.47 yen vs. 118.72 last Friday while the euro rose to $1.1861 vs. $1.1701.

Tune In TaskMaster

I'll be back on WABC radio's Batchelor & Alexander show Friday evening, sometime around 9 p.m. PST/12 a.m. EDT. (OK, that's really Saturday morning for East Coasters). The show is nationally syndicated, so check for local listings or Webcast options.
Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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