Considering the bad news greeting investors at the start of the week, the market was faring reasonably well midday Monday. After major stock proxies plunged to three-month lows last week, the question for sentiment watchers is whether enough negativity has been priced in the market to allow a tradeable bounce or even a fourth-quarter rally.

By midday, the tepid momentum of stocks offered few clues, apart from an apparent willingness to stop the bleeding from last week, when the Dow Jones Industrial Average lost 2.6%, the S&P 500 dropped 2.7%, and the Nasdaq Composite fell 2.8%.

After spending most of the morning in modestly positive territory, the Dow was recently down 0.1%, at 10,282.95. The S&P 500 was losing 0.4%, to 1191.46 and the Nasdaq was down 0.2%, at 2085.65.

However, the modest declines could be considered a sign of resilience considering:
  • Delphi Automotive (DPH) filed for bankruptcy over the weekend, a move that may hit General Motors (GM) to the tune of $10 billion.
  • Dana (DCN) fell sharply after saying it would restate its earnings, while defense contractor Northrop Grumman (NOC) also warned.
  • There were also two high-profile profit-warnings in the tech sector Monday, from Xilinx (XLNX) and Unisys (UIS).
  • There were some factors offsetting the bad news, such as Lincoln National's ( LNC) $7.5 billion acquisition of Jefferson Pilot ( JP); an upgrade of IBM ( IBM) and; Wal-Mart ( WMT) reaffirmed its earnings guidance.

    Yet, overall action remained tilted toward selling, with declining issues outpacing gainers by 19 to 11 in recent Big Board trading and by 4 to 3 on the Nasdaq.

    And while the price of crude oil continued to drop Monday -- it was recently down 31 cents to $61.53 per barrel -- the overall impact on the broad market remains negative. A slide in energy stocks last week has weighed considerably on the major indices.

    From Complacent to Panicked

    As the third-quarter earnings season begins in earnest this week, the negative corporate announcements Monday morning could have provided more fodder to investors eager to continue last week's selling trend. But several strategists believe that the negativity seen last week and the resulting lower stock valuations provide a buying opportunity.

    The lack of further downside Monday, however, reflected that to a large degree, investor concerns have firmly shifted toward inflation and higher interest rates. This was evident last week when hawkish comments from Federal Reserve caused stocks to plunge three days in a row.

    There were also underlying fears that the most recent spike in energy costs may break the back of the consumer, which together with a hawkish Fed, could lead the economy into recession next year.

    While all these risks may be real, Citigroup economist Steven Wieting notes that investors last week "seemed to go from complacent to panicked" as "a renewed sense of risk often brings with it exaggeration."

    The most recent pullback, Wieting says, makes the market more susceptible to react to positive news. His candidates for positive catalysts include a return to some normalcy in the Gulf Coast's refining operations and further drops in gasoline prices, which would put a cap on consumer price inflation.

    In the meantime, investors will pay close attention to Tuesday's release of the minutes of the Sept. 20 Fed meeting, when the central bank decided to hike rates in spite of Hurricane Katrina. The September consumer price index and retail sales, to be released on Friday, will also be key.

    According to Ned Riley, chief investment officer at Riley Asset Management, the September CPI may be the near-term catalyst that the market needs to rally for the rest of October, providing a "buy on the news" opportunity. He believes that inflation fears have been overdone, and that the Fed will stop hiking rates early next year, amid more evidence that the consumer is hurt by rising energy costs and a slowing housing market.

    As originally published, this column contained an error. Please see Corrections and Clarifications.

    In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.

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