Stocks Take A Breather After Strong Gains, Financials Falter
NEW YORK (MarketWatch) -- U.S. stocks moved lower Monday, with investors trimming positions following a rally that saw the market rise in four of the previous five sessions, while the stocks of troubled financial firms also suffered from several broker downgrades.
Technology shares also gave back some of their strong gains seen Friday, when they received a boost from news that Microsoft Corp. bid $44.6 billion for search giant Yahoo Inc. .
"Last week we saw substantial gains, and we've rallied overall since the [Federal Reserve's] emergency rate cuts," said Ken Tower, chief market strategist at Covered Bridge Tactical. "The market needs to take a pause to catch its breath."
After rallying 4.4% last week, the Dow Jones Industrial Average finished down 108 points at 12,635, with 23 of its 30 component stocks in negative territory.
Blue-chip American Express Co. fell 3.9% after UBS downgraded the stock. Other bank stocks were also under pressure as Merrill Lynch downgraded Wells Fargo & Co. and Wachovia Corp. .
"Financials have been a drag today," said Elliot Spar, market strategist at Stifel Nicolaus.
Among the few gainers on the Dow were defensive issues such as drugmakers Merck & Co. Inc. , Pfizer Inc. and Johnson and Johnson .
The S&P 500 Index lost 14.6 points to 1,380, while the Nasdaq Composite Index dropped 30 points to 2,382.
Trading volumes showed 1.3 billion shares exchanging hands on the New York Stock Exchange, with declining issues topping gainers by a ratio of 3 to 2. On the Nasdaq, 2.0 billion shares traded, with decliners topping gainers by 4 to 3.
"Volatility is likely to remain high in the near term as the debate rages over the magnitude of the US (and global) economic slowdown," said Stuart Freeman, chief equity strategist at AG Edwards.
Stocks rallied in the last 10 days of January as the Federal Reserve cut interest rates by 125 basis points, down to 3%, to help prevent the U.S. economy from sliding into recession.
Friday's news that jobs unexpectedly fell in January fueled concerns about the economy, keeping the market focused on whether the central bank will continue delivering more rate cuts.
"We've had a relief rally based on actions taken by the Federal Reserve to stabilize the financial system," said Tower of Covered Bridge. "Fed policy remains critical."
Investors will tune in later this week to a deluge of speeches by Fed officials to gain more insight into the thinking of central bankers.
Fizz out of techs
Microsoft's bid for Yahoo remained in the news, after Yahoo made public an email suggesting that the software giant's bid was "one of many options." Google Inc. also traded shots with Microsoft over the weekend, with its chief legal officer saying in a blog post that the deal could undermine open competition on the Internet.
The Wall Street Journal also reported that Google Chief Executive Eric Schmidt has offered his company's help in any effort to fight off the unsolicited offer.
Google shares fell nearly 4% to close at $495.43, slipping under $500 for the first time since mid-August.
Yahoo shares gained another 3.3%, while Microsoft lost 0.8%.
Mixed review for financials
The financial-services sector got a mixed review from analysts.
Feeling more optimistic about brokers than UBS and Merrill Lynch about banks, Punk Ziegel analyst Dick Bove upgraded shares of Lehman Brothers Holdings to buy, citing meaningful interest rate cuts, a surge in mortgage refinancings and rising equity markets. Bove also raised his rating on Goldman Sachs Group , Bear Stearns Cos. , and Merrill Lynch & Co. to market perform.
But brokerage stocks, which have rallied recently, were under pressure Monday, with the Amex Broker/Dealer index down 2.3%.
"Financials are relatively cheap on a longer-term basis," said Tower of Covered Bridge. "But Im not sure you buy them yet. A sector can get cheap well before it actually it bottoms out and turns around."
Other markets
The dollar strengthened slightly against the Japanese yen, adding 0.2% to 106.71 yen, but edged lower against the euro.
Crude prices turned higher, after sliding last week, boosted by temporary closure of a key waterway in Texas. The March-dated light crude oil contract rose $1.06, or 1.2%, to $90.02 a barrel.
With little key economic data out this week, various markets are waiting for clues from Fed officials about future monetary policy before taking more bets on the fate of the U.S. and global economy.
A speech by Fed Gov. Randall Kroszner on Monday yielded no new insights. But he will be followed by Richmond Fed President Jeff Lacker on Tuesday and Wednesday. Philadelphia Fed President Charles Plosser will also speak Wednesday, followed on Thursday by Atlanta Fed President Dennis Lockhart, Dallas Fed President Richard Fisher and San Francisco Fed President Janet Yellen.
On the move
In company news, Walgreen Co.'s January sales rose 2.3%, to $4.96 billion from $4.52 billion a year earlier, while comparable store sales increased 3.8%.
Health-benefits group Humana Inc. said fourth-quarter net profit rose 57% to $243.2 million, or $1.43 a share, topping market expectations due to a lower tax rate and gains on the sale of a venture-capital investment. The firm also raised its 2008 earnings outlook.
Archer Daniels Midland Co.'s fiscal second-quarter income rose 7% to $473 million, or 73 cents a share, as a result of heightened product demand and geographic crop imbalances.
Among other companies due to report after the close Monday, Yum Brands Inc. is expected to post earnings of 42 cents a share for the fourth quarter.
Asia markets rallied Monday, led by shares in Shanghai after the Chinese market regulator approved the launch of two new stock funds.
European stocks also closed slightly higher.
By Nick Godt