Calm Surface Masks Turmoil

Relatively modest moves by the major averages aside, Tuesday was a significant day in the financial markets. The dollar got slammed, which fueled gains in commodity prices; that, in turn, spurred a self-generating cycle of more dollar losses, especially against the currencies of commodity-producing nations such as South Africa. Meanwhile, the Treasury market got whipsawed by the dollar's weakness, more concerns about central bank selling, and some potentially conflicting commentary from three Federal Reserve governors.

Yet all the sturm und drang in the so-called other markets had seemingly no dramatic effect on major averages, although they ended lower and near their lows of the session. The Dow Jones Industrial Average fell 0.2% to 10,912.62, the S&P 500 lost 0.5% to 1219.43 and the Nasdaq Composite shed 0.8% to 2073.55.

There was some angst about the dollar, however, which fell to a two-month low vs. the euro after a key European Central Bank policymaker said the eurozone has "extremely low interest rates," which "will boost inflation in the end." That spurred speculation of a possible ECB rate hike. The central bank has kept its key lending rate at 2% since June 2003. ECB tightening would minimize the newly minted yield advantage of the fed funds rate -- which the Fed has raised to 2.50% with its "measured" tightening campaign -- and thus the potential appeal of dollar-denominated assets.

Speaking of the Fed, "my expectation is that the committee will continue to remove policy accommodation in a measured way," Fed Governor Ben Bernanke said in a speech at the Executives' Club of Chicago. Conversely, St. Louis Fed President William Poole, in a separate speech, said he expected the measured language to be removed eventually, while Philadelphia Fed President Anthony Santomero said "it's neither customary nor necessary for the Fed or any other central bank to announce long-term policy in its statements."

Despite the apparent inconsistencies, those statements were interpreted as more evidence the Fed might soon drop the "measured pace" language, according to Tony Crescenzi, chief bond strategist at Miller Tabak and a RealMoney.com contributor. Such a move could cause concern that "the Fed wanted the flexibility to shift to 50 basis point rate hikes," he wrote.

At least partially in reaction, the price of the benchmark 10-year Treasury fell 19/32, its yield rising to 4.38%. Supply concerns also weighed on Treasuries ahead of the government's $15 billion auction of five-year notes Wednesday and $9 billion of 10-year notes Thursday.

Concern about foreign central banks' interest in the auction also may have been a factor in Tuesday's selloff; the issue of foreign ownership certainly weighed on the dollar.

On Monday, the Bank for International Settlements reported the dollar accounted for 67% of the deposits of Asian central banks (excluding Japan) and commercial banks, down from 81% in the third quarter of 2001.

But the BIS data only included cash and other short-term instruments, and indicated that that dollar-denominated deposits have grown in absolute terms.

"The data may reflect the shifting further out on the yield curve, like many investors have done, in this environment of low interest rates," according to RealMoney.com contributor Marc Chandler. "Nevertheless, the market is using this report as an excuse to do what it wanted to do in the first place, and that's to sell the U.S. dollar."

The dollar fell to 104.65 yen vs. 105.16 late Monday while the euro rose to $1.3332 vs. $1.3212. As is often the case, commodities -- which are priced in dollars -- rallied as the greenback fell, helping the Reuters-CRB Index reach its highest level since January 1981. Among individual commodities, copper hit a 16-year high of $1.4995 a pound, oil gained 70 cents to $54.59, and gold rose $4 to $439.80 per ounce.

The commodity action led to gains in related stocks, with miners such as Compania De Minas Buenaventuras ( BVN) and Goldcorp ( GG) among the Big Board's biggest percent gainers. The Philadelphia Stock Exchange Gold and Silver Index rose 3.4%.

But the commodity-stock complex was uneven Tuesday, with energy stocks mixed -- the Oil Service Index fell 0.8% -- while steel stocks such as AK Steel ( AKS) and U.S. Steel ( USX) were slammed by concerns about the supply/demand equation in China.

Tech's Siren Song

Rightly or wrongly, the stock market's general weakness was attributed by some to Texas Instruments' ( TXN) disappointing first-quarter guidance. Texas Instruments fell 3.8% and the Philadelphia Stock Exchange Semiconductor Index shed 1.4%, snapping whatever momentum was generated by Monday's rare day of outperformance by tech stocks. (The Comp fell back below its 50-day moving average, although volume was down from Monday's level.)

Back on Feb. 25, I wrote about how some investors were being lured back to tech stocks, a movement that has gained adherents in recent weeks amid rising speculation of a rotation out of "new mo" (energy stocks) and into "old mo" (tech).

"We continue to wrestle with a possibility that valuation multiple compression in the cyclical areas of the economy will continue ... even if the 2005 earnings growth significantly exceeds expectations," wrote Vadim Zlotnikov, chief investment strategist at Sanford Bernstein. "Thus, we are underweight capital equipment and commodity stocks, while maintaining an overweight in technology. This reflects our view as to where expectations are more achievable, rather than a belief in a new technology spending supercycle (e.g. semiconductor capital equipment, software, services, communication equipment)."

Hardly a raging endorsement for tech, but an endorsement nonetheless -- one of a rising number.

In early February, I expressed a bullish view on tech while filling in for Jim Cramer on his radio show. That outlook was based, in part, on a contrarian bet -- tech funds had just experienced the longest string of outflows since June 2002.

But the speed at which interest in tech stocks returns at even the slightest upturn, and the emotional craving for "tech leadership" among many traders, has me rethinking whether the "contrarian view" really ever was one. If nothing else, it is quickly becoming consensus.

Aaron L. Task is the co-executive editor of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to atask@thestreet.com.

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