Well, it didn't take long for those weak technical conditions to do damage in the Nasdaq Composite. As noted here Monday, the index has been struggling to breach its 52-week highs for more than a week. On Tuesday, investors threw in the towel and took the index down more than 2% to 2107.86.

The Dow Jones Industrial Average, which had not shown the same pattern of failed highs, lost almost 100 points, or 0.9%, to 10,630.78, while the S&P 500 lost 1.2% to 1188.04.

Higher oil prices, tax-related profit-taking and all the usual excuses were blamed when the indices lost slight opening gains and started plunging after 10 a.m. EST. But the initial drop accelerated sharply after 2 p.m. EST, when the Federal Reserve released details behind its December decision to hike short-term rates.

Minutes of the Dec. 14 Federal Open Market Committee meeting showed the world just how committed the central bank is to raising rates further. A side comment about "excessive risk-taking" brought back memories of Alan Greenspan's Dec. 5, 1996, "irrational exuberance" remark.

In reaction, pronounced weakness showed up in semiconductors, with the Philadelphia Stock Exchange Semiconductor Index down 3.3% on the day; homebuilders, with the Philadelphia Housing Index down 2.8%; and mining companies, with the Amex Gold Bugs index down 2.1%. Among individual names in those sectors, Intel ( INTC) dropped 2%, Centex ( CTX) shed 5% and Freeport McMoran ( FCX) lost 4%.

McDonald's ( MCD), up 0.8%, was one of only four stocks in the Dow that finished in the green.

Breadth was strongly negative, with three times as many stocks falling as rising on both the Nasdaq and the New York Stock Exchange. Also worrisome for bulls, the selloff was accompanied by rising volume, with 2.7 billion shares traded on the Nasdaq and 1.7 billion on the Big Board.

But the indices did climb off their lows for the day -- the Nasdaq found support just above its Dec. 9 low of 2097 -- and the outlook isn't dire after comparing the day's action to similar selling frenzies in the past two years.

Groping for Support

Since hitting 2191.60 early on Monday, the index has dropped like a stone. More precisely, the index's intraday low of 2100.56 on Tuesday was 4% below its intraday high of the previous day. There have been 11 occasions in the past two years when the Nasdaq's intraday low was at least 4% below the previous day's intraday high, and most of those were associated with bottoms vs. market tops.

An intraday low at least 4% below the previous day's intraday high happened three times in January 2003 and once in March 2003. Those came as the index was making a bottom below 1400 before taking off for the rest of the year and rising to 2100 by January 2004.

The next five instances came as pauses amid that long bull run. Then on Jan. 29, 2004, a selling frenzy presaged the end of the rally. Finally, the most recent two drops came on July 22 and Aug. 6 last year, again as the Nasdaq was moving toward a bottom on Aug. 13 before rallying for much of the rest of 2004.

In addition to the technical indicators, the fundamental economic backdrop for stocks was poor as well. Oil prices rose 4% to $43.91. The dollar, which helped shares of U.S. multinationals and other exporters during its recent decline, reversed course and strengthened. Chain-store sales rose just 0.2% for the week ended Jan. 1. And even the one report that was touted as a big upside surprise, factory orders, was really not so great beneath the headline number.

The Commerce Department said that factory orders rose 1.2% in November to $377.4 billion, ahead of the 1% gain expected by forecasters. But looked at through the subindex preferred by economists, which excludes volatile aircraft orders, factory activity didn't look good at all.

In fact, orders excluding transportation showed no gain in November. Excluding aircraft and the Defense Department, it wasn't quite that bad, with orders for capital goods rising 0.8%.

Monitoring the Minutes

The aforementioned FOMC minutes indicated that the Fed has a pretty sanguine view of the economy. Concerns about inflation were growing and weakness seen in the November payrolls report was dismissed. That spells a steady diet of modest hikes ahead, without any sign of pause.

Even after the 0.25 percentage point hike in the fed funds rate to 2.25% adopted at the meeting, "the current level of the real funds rate target remained below the level it most likely would need to reach to keep inflation stable and output at its potential," the committee members concluded. "With the economic expansion more firmly entrenched, cost and price pressures were likely to become a clearer intermediate-term risk to sustained good economic performance absent further reduction of accommodation."

In a section discussing risk, the minutes noted that "some participants" were worried that the lengthy period of historically low rates had bred some dangerous speculative excesses.

Or in Fedspeak: "signs of potentially excessive risk-taking in financial markets evidenced by quite narrow credit spreads, a pickup in initial public offerings, an upturn in mergers and acquisition activity, and anecdotal reports that speculative demands were becoming apparent in the markets for single-family homes and condominiums."

Those comments spooked some traders -- equity and fixed income alike -- into thinking Fed rate hikes going forward may not be as "measured" as they were in 2004. The price of the benchmark 10-year Treasury fell 21/32, sending its yield up to 4.29%. Meanwhile, the yield on the two-year note, which most closely tracks the fed funds rate, rose to 3.20%, its highest level since 2002.

As discussed here, the pickup in IPOs last year hardly looks indicative of the frothy markets of 1999 and 2000. Companies going public had stronger results and longer histories than those of the bubble era. And returns on IPOs were sweet -- rising 29% on average -- but nothing like the average 276% return in 1999, according to Renaissance Capital.

But ultratight spreads on junk bonds and crazy housing prices do seem more than a bit worrisome. Both phenomena are directly related to the Fed's decision to keep interest rates so low for so long.

As always, the minutes don't identify just which committee members were worried about potential "excessive risk-taking." So outsiders will have to wait for further speeches to see if it included someone influential like Greenspan or someone less well-known, like Sandra Pianalto (president of the Cleveland Fed, for those keeping score at home).

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback.

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