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Market Update 070221
http://biz.yahoo.com/mu/update.html

4:20 pm : The indices finished mixed Wednesday as a modest warning signal about a potential firming in inflation rates weighed on sentiment and exacerbated the temptation to take some money off the table.

Mindful that so many indices -- from the Dow Industrials, Transports and Utilities to the S&P 400 MidCap and Russell 2000 -- hit record highs a day earlier, a sense that stocks are overbought on a short-term basis contributed to an underlying sense of nervousness as investors awaited the latest read on consumer inflation.

Valuation concerns came under additional scrutiny around 8:30 ET when the Labor Dept. showed that core CPI in January rose 0.3%. That was the biggest increase since June and followed three consecutive tame readings of 0.1%. It also pushed the year-over-year increase in the core rate to 2.7%, clearly above the Fed's desired range.

While the one month read on inflation does not signal a new trend, it does signal that inflation pressures may not have diminished as much as the market had hoped, which tarnished the Goldilocks scenario painted last week by Fed Chairman Bernanke's surprisingly dovish commentary.

With the Dow fresh off closing in record territory for four straight days, it wasn't surprising to see the blue-chip average come under some profit-taking pressure. The Dow's biggest disappointment was Hewlett-Packard (HPQ 41.09 -2.04), which plunged 4.7% after failing to impress shareholders with its earnings release last night. H-P's Q1 earnings topped Wall Street forecasts, but Q2 guidance that barely exceeded analysts' expectations gave investors an excuse to lock in recent gains. The stock is up 50% since bottoming in June of last year.

Fellow Dow component Microsoft (MSFT 29.35 +0.52), however, fared much better and was the biggest reason behind the Nasdaq's ability to hold onto a small gain. Microsoft, the tech-heavy Composite's most heavily-weighted component, was up 1.8% following reports that the state of Texas [alone] is expected to generate more than $6 bln of Windows Vista-related products and services this year.

Of the eight sectors closing lower, Utilities turned in the worst performance but the absence of leadership in the more influential Health Care sector was more noteworthy. Medtronic (MDT 51.91 -2.63) topped Wall Street expectations last night, but management narrowing its full-year revenue and earnings guidance earmarked the stock as the sector's biggest laggard (-4.8%).

Dow component Merck (MRK 43.94 -0.56) plunging 1.4% after reportedly suspending its Gardasil mandatory-vaccination campaign also offset strength among PBMs -- one of the day's best performing S&P industry groups. Medco Health Solutions (MHS 67.66 +6.07) soared nearly 10% to an all-time high after following up a 29% rise in Q4 profits by projecting 2008 EPS growth of at least 20%.

Materials was the day's best performing sector, but that was due in large part to gold prices, which can act as an inflation hedge, surging 3.2% to nine-month highs. Energy also finished to the upside and helped to offset some of the losses on the S&P 500. However, renewed enthusiasm for beaten down energy names also came at the expense of surging oil prices.

Crude for April delivery rose 2.1% and closed above the psychological $60/bbl mark in anticipation that tomorrow's weekly inventory report will show a larger than expected drawdown in distillates. Even though total CPI rose just 0.2% in January, reflecting the fact that falling energy prices remain a factor in pulling down overall inflation rates, oil prices above $60/bbl raise concerns about the commodity's potential to curb spending and worsen what is already expected to be a year of decelerating earnings growth. DJ30 -48.23 NASDAQ +5.38 SP500 -2.05 NASDAQ Dec/Adv/Vol 1488/1531/2.05 bln NYSE Dec/Adv/Vol 1799/1479/1.37 bln

3:30 pm : Stocks continue to trade relatively sideways going into the close as there still isn't a strong sense of conviction on either the bullish or bearish side of the aisle. As reflected in the A/D line and evidenced by the Dow turning in the worst performance among the majors, decliners on the NYSE hold an 18-to-13 edge over advancers. Twenty eight of the Dow 30 are listed on the Big Board.

The Nasdaq is clinging to the smallest of gains as advancing and declining issues remain evenly matched. That is noteworthy since Technology leadership remains absent; but tech's weakness is due in large part to a 4.2% sell-off in shares of Hewlett-Packard (HPQ 41.30 -1.83), which accounts for roughly one third of the Dow's 45-point decline. DJ30 -44.75 NASDAQ +1.35 SP500 -2.54 NASDAQ Dec/Adv/Vol 1548/1463/1.69 bln NYSE Dec/Adv/Vol 1846/1394/1.10 bln

10:00 am : The indices extend their reach to the downside as nine out of 10 sectors are now trading lower. Technology (-0.6%) is pacing the way as the Computer Hardware group's (HWI -0.5%) year-to-date gains are nearly halved after Hewlett-Packard's (HPQ 41.83 -1.30) Q2 outlook barely exceeded analysts' expectations.

Fellow Dow component Intel (INTC 20.86 -0.32) is also under pressure following downbeat commentary out of Prudential while analyst downgrades on Motorola (MOT 18.93 -0.23) and Qualcomm (QCOM 42.36 -0.33) are also taking a toll on tech. The absence of leadership from the influential Financials sector, as the diminished hopes of a Fed easing in the near future prompts consolidation in rate-sensitive banks and brokers. DJ30 -68.98 NASDAQ -10.66 SOX -0.5% SP500 -6.38 NASDAQ Dec/Adv/Vol 1569/937/204 mln NYSE Dec/Adv/Vol 1788/818/76 mln

09:40 am : As if overbought conditions weren't already in the front of investors' minds, especially with several indices closing at record levels yesterday, a modest warning signal about a potential firming in inflation rates is exacerbating the temptation to lock in recent market gains.

Earlier, the Labor Dept. showed total CPI for January rose just 0.2%, reflecting the fact that falling energy prices remain a factor in pulling down overall inflation rates. More notably, however, core CPI rose 0.3%, the biggest increase since June. That pushed the year-over-year increase in the core rate to 2.7%, clearly above the Fed's desired range, and follows three consecutive tame reads of 0.1%. While the one month read on inflation does not signal a new trend, it does signal that inflation pressures may not have diminished as much as the market had hoped following Bernanke's recent testimony and removes some of the enthusiasm regarding the likelihood of a rate cut anytime soon. DJ30 -49.23 NASDAQ -8.66 SP500 -4.78 NASDAQ Vol 82 mln NYSE Vol 48 mln

09:15 am : S&P futures vs fair value: -6.2. Nasdaq futures vs fair value: -8.8.

09:00 am : S&P futures vs fair value: -6.0. Nasdaq futures vs fair value: -9.2. Futures trade continues to deteriorate since investors were pricing in more evidence of moderating inflationary pressures, especially following Bernanke's surprisingly dovish commentary last week. Even though the 0.3% rise in Jan. core CPI could prove to be a one-month aberration, since the core rate had been up just 0.1% in each of the prior three months, the Goldilocks scenario from last week has diminished.

Throw in a Q1 report and Q2 guidance from Dow component Hewlett-Packard (HPQ) that failed to impress Wall Street and the stage remains set for participants to take some money off the table.

08:35 am : S&P futures vs fair value: -4.6. Nasdaq futures vs fair value: -8.0. Futures trade weakens within the last few minutes, taking a bearish cue from a reversal in Treasuries following the latest read on consumer inflation. Total CPI rose 0.2% in January (consensus 0.1%).

Core CPI rose 0.3% (consensus 0.2%), the biggest increase since June. That lifts the year/year rate to 2.7%, compared to the Fed's comfort zone of below 2.5%, piquing some uncertainty about the potential for a rate cut anytime soon. The 10-year note, which was up 1 tick to yield 4.66% before the data, is now down 6 ticks to yield 4.69%.