The morning sun is shining like a red rubber ball
It's bouncing and it's shining like a red rubber ball

-- Simon and Garfunkel

Slumping like all-star shortstop Alex Rodriguez in the baseball playoffs, the markets are now 0-for-3 in 2005. After ending 2004 with a solid fourth-quarter gain, the Nasdaq Composite continues to bounce downward, producing ever-uglier charts.

On Wednesday, the index opened higher and quickly sold off, as it has all this week. As on Tuesday, the intraday high of 2116.75 was lower than the previous day's, and the intraday low of 2091.24 was lower. Volume was high again -- albeit down from Tuesday's level -- amid the slippage, and losers outnumbered gainers by more than 2 to 1.

The action was bouncier on Wednesday, bringing to mind the Simon and Garfunkel verse cited above.

There were eight thrusts upwards during the day, all of which failed to hold, and the Comp closed at its low for the session, down 0.8% to 2091.24. The charts portend more weakness in the short term. But as mentioned yesterday, all hope is not lost. The deep selling frenzy seen over the past few days has occurred a dozen times in the past two years, usually as a bottom was forming. There were three days like Tuesday back in January 2003.

Compared with the Comp, the Dow Jones Industrial Average has had a less unpleasant but still losing voyage so far in 2005 as well. It lost almost 33 points, or 0.3%, to 10,597.83 on Wednesday. The S&P 500 lost 0.4% to 1183.74.

The story was much the same for three groups that led Tuesday's plunge. The Philadelphia semiconductor index opened higher despite Xilinx's ( XLNX) lowered forecast, but ended up losing 1.5% to 404.25. The exchange's housing index also opened higher then slumped and closed down 1.1%. The Amex Gold Bugs index held a gain of over 1% almost until lunchtime before it too swerved down, finishing at 0.2%. Xilinx ended the day down 3.2%, homebuilder Pulte ( PHM) lost 0.8%, and Goldcorp ( GG) ended with a 1.4% loss. Futures on gold hit their lowest level since November, finishing at $427.20.

Airline stocks were among the worst losers after Delta ( DAL) announced a plan to slash its highest fares by 50%, prompting a downgrade from Merrill Lynch and igniting fears that a price war might be about to break out. Delta lost 7% on the day, American Airlines' parent AMR ( AMR) fell 10% even as it announced strong December results, and Southwest ( LUV), the low-cost leader, finished unchanged.

The dollar ended its three-day winning streak, though not decisively, and its impact wasn't felt in stocks. The boost from Tuesday's release of the hawkish Federal Reserve Open Market Committee's December minutes proved to be a one-day phenomenon for the dollar and interest rates.

The implied yield on the LIBOR short-term interest rate futures contract of December 2005 finished at about 3.70%, where it had ended up Tuesday. The LIBOR rate is typically about 0.25 percentage point higher than the fed funds rate, so the futures market is signaling 125 more basis points of tightening this year. That's up from under 100 basis points just three weeks ago.

Laboring Toward Friday

Wednesday's fundamental economic news wasn't good either, though it didn't have much impact on the stock market. The yield on the 10-year Treasury note got a mild kick that didn't last. It finished at 4.28%, about where it started.

Outplacement consulting firm Challenger, Gray & Christmas said announced job cuts hit 109,045 in December, 4% higher than the previous month and 17% higher than a year earlier. That's an ill wind blowing ahead of Friday's high-profile December payrolls report. The report doesn't have a solid correlation with the payrolls number, however, so its market impact was muted.

The Mortgage Bankers Association's weekly index of lending activity took a tumble as well. One week hardly makes a trend, but downward pressure has been in place for a couple of weeks now. And although some analysts blew off the decline by blaming the year-end holidays, the index is seasonally adjusted. That means that if a significant drop-off in applications typically occurs in the last week of the year, the seasonal adjustment would expect such a drop and eliminate it from the week-to-week change. Instead, the index is saying that the drop last week was much larger than would ordinarily be expected even at the end of the year.

Still, mortgage rates remain pretty low, and the component of the index for purchase loans is slightly above where it was a year ago. The refinance index is slightly below its year-ago level. Economy.com's Celia Chen says the pool of mortgages that can profitably be refinanced has shrunk dramatically, limiting a top source of liquidity for consumers over the past few years.

The Institute for Supply Management's services index rose to 63.1 in November, a bit more than forecast. Any reading above 50 signals expansion in that part of the economy. But the subindex for employment didn't show any improvement. Coming on the heels of a subpar employment reading for the manufacturing sector, it's another bad omen for Friday's payrolls.

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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