Providing further evidence the postwar rally has run out of steam, even a big merger in biotech couldn't prevent major averages from slumping Monday. As the weakness evident late last week carried over, market internals were the weakest in recent memory, although volume was modest and indices finished off the session's worst levels.

After trading as low as 9038.29 shortly after 3 p.m. EDT, the Dow Jones Industrial Average finished down 1.4% to 9072.95. The S&P 500 shed 1.4% to 981.65 after trading as low as 977.40, and the Nasdaq Composite lost 2.1% to 1610.82 vs. its intraday low of 1601.40.

In a reversal of recent trends, declining stocks whipped advancers 3 to 1 in both Big Board and over-the-counter trading while new 52-week highs led new lows by a relatively minuscule 60 to 9 and 88 to 9, respectively. Declining volume was 90% of the 1.2 billion shares total on the Big Board and over 80% of the nearly 1.6 billion shares traded over-the-counter. Reflecting the extent of the selling, the one-day Arms Index -- which measures the ratio of advancing issues to declining issues by the ratio of advancing volume to declining volume -- jumped 120% to 2.33.

Still, volume was relatively modest, which may provide some solace to the optimists, i.e., evidence that this was just a temporary (and "necessary") setback for an overextended market. Lower volume on down days has been a key characteristic of the rally, particularly since the March lows.

"The market had definitely gotten ahead of itself and expectations propelled the market ahead of reality," said Scott Curtis, head of U.S. equity trading at Credit Lyonnais. "The market was due to sell off."

Still, market breadth and the overall negative tone of trading suggest something has changed.

So dramatically has momentum shifted to the downside that some are discussing likely stopping points for this decline, which actually began last Tuesday for the Dow and on Wednesday for the S&P and Comp.

Candidates included the 50- and 200-day moving averages, which began the week at around 8721/8064 for the Dow, 944/891 for the S&P and 1535/1387 for the Comp.

Obviously, there are some big point differentials between those levels for each of the averages.

As posited in's Columnist Conversation, I can envision the indices falling near term until they approach those 50-day moving averages, then rally as quarter-end "window dressing" takes over later this week and on Monday. (The strength of that rally and any presumptive follow-through could determine whether a "summer rally" or a revisit of those 200-day moving averages occurs next.)

Then again, "everybody" is expecting mutual fund managers' quarter-end consideration to buoy the market before month's end, so perhaps such forces will be mitigated this time around.

Something Has Changed, Continued

A few weeks ago, news of a merger between Idec Pharmaceuticals ( IDPH) and Biogen ( BGEN) would have spurred huge "Who's next?" speculation in the biotech sector and probably spilled over into broader stock proxies.

On Monday, by contrast, news of the merger didn't even spur the particulars higher, much less the biotech sector and certainly not the broader market. Idec and Biogen each lost over 5% while the Amex Biotech Index shed 3.9%.

The reaction to the Idec-Biogen news confirmed evidence last week of waning momentum in previously standout sectors.

Rather than excitement about the merger, traders seemed to focus on warnings from firms such as Tenet Healthcare ( THC) and Rohm & Hass ( ROH), as well as European consumer giants Unilever ( UL) and Heineken. Elsewhere, Fannie Mae ( FNM) fell 2.7% after The New York Times reported the company lost billions as interest rates fell in the past year.

In addition to the news flow, a concern about more preannouncements -- and a rare sunny day in Manhattan -- may have made traders hesitant to buy ahead of the two-day meeting of the Federal Reserve's rate-setting body. The growing consensus on Wall Street is the Fed will opt for a 25-basis-point rate cut rather than a more aggressive half-point cut, which would be more favorable for speculation and its practitioners.

Fed funds futures are currently pricing in a 100% probability of a 25-basis-point rate cut and a 52% probability of an additional 25-basis-point cut. Odds for a 50-basis-point ease are up from Friday's levels but are off last week's highest levels of around 70%.

In addition to overzealous expectations and Federal Open Market Committee anticipation, Curtis said the market was dampened Monday by options activity in the wake of Friday's so-called quadruple witching session. Traders short out-of-the-money calls that expired on Friday may have initiated similar positions Monday, he said; selling calls is tantamount to shorting the stock. "Monday after expiration is usually down, at least early, and with the earnings expectations and defensive state of the market going into the Fed meeting, there were other things for the market to chew on," he said.

Weakness in the stock market, for myriad reasons, helped Treasuries rebound from last week's shellacking. The price of the benchmark 10-year note rose 11/32 to 102 17/32, its yield falling to 3.32%.

Strength in bonds did not, however, prevent the dollar from continuing its recent rally vs. the euro, which fell to $1.1546 from $1.1607 late Friday. The dollar is now trading at 117.69 yen vs. 118.33 yen on Friday.

Commodities resumed their recent trends, meanwhile, with gold futures sliding 0.9% to $353.20 per ounce and crude futures shedding 5.8% to $29.04 per barrel.

Good Call Deserves Another

Last Tuesday , I wrote about the "take some money off the table" call by Steven Galbraith, chief domestic strategist at Morgan Stanley. That proved to be a well-timed recommendation as stock proxies peaked early last week, at least near term.

Consistent with that lowered recommended equity allocation, Galbraith on Monday adopted a "slightly more defensive allocation," raising consumer staples and industrials to overweight levels and lowering technology to underweight.

"We believe the tech sector is discounting a significant amount of good news," Galbraith wrote, and Monday's recommendations are "a clear case of selling what has worked recently and buying what has not."

Galbraith maintains overweight recommendations in energy and health care, market-weight in basic materials and underweight recommendations in financials, consumer discretionary, telecom and utilities.
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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