MarketView for January 20

Summary

Despite a barrage of better economic news, stock prices were dragged lower by technology and materials shares. Bond prices dropped, pushing the benchmark yields that help determine mortgage rates higher. The dollar rallied. As a result, all three major equity indexes into negative territory by the closing bell as the lackluster tech and materials earnings performance failed to live up to heightened expectations, threatening to short-circuit a seven-week run.

Morgan Stanley posted stronger-than-expected revenue to help the financial sector rise modestly, while its shares ended the day up 4.6 percent to close at $29.02. However, on the technology side F5 Networks fell 21.4 percent to $109.15 and pulled the Nasdaq lower after the leader in the network optimization market forecast weak second-quarter revenue.

Google was up 2.2 percent to close at $640.79 in after-hours trading after the company reported better-than-expected net revenue for its fourth quarter. At the same time, Google indicated that co-founder Larry Page will replace Eric Schmidt in April as chief executive.

In the commodity world, Freeport-McMoRan Copper & Gold lost 3.7 percent to close $110.90 after the copper producer trimmed its sales forecast and said costs would rise. Natural resources stocks also came under pressure after data showing high growth in China stoked fears the country may need to tighten credit in order to check inflation.

Interestingly, the markets did not react to the positive jobs and housing market data that pointed to a strengthening recovery. Furthermore, crude oil futures posted a third consecutive lower settlement. The expiring February crude contract settled at $88.86 per barrel, down 2.2 percent, which was the largest percentage slide since prices fell 2.37 percent on January 4. So what does it all mean? Regretfully, such action on the part of stocks could be an anticipation of a short pull back in share prices across the board. Longer term, I am still on the bull side of the Street.

Reinforcing that line of thinking was the fact that Alcoa was down 0.5 percent to close at $15.98, while Exxon Mobil fell 0.6 percent to $77.75. And Parker Hannifin saw its share fall 6.1 percent to $85.51. The company, which makes industrial control systems, exceeded earnings expectations, but the stock slid nonetheless.

The latest data indicated that two weak spots in the economy -- housing and jobs -- appear to be on the mend. Existing home sales rose more than expected in December despite bad weather as the housing sector struggled to recover from a severe slump, according to a report from the National Association of Realtors.

Prior to the opening bell, the Labor Department reported that initial jobless claims posted their largest weekly decline in nearly a year.

Volume was above average with about 9.04 billion shares traded on the three major exchanges, exceeding last year's daily average of about 8.47 billion.

Economic Data Improving

Home re-sales rose more than expected in December and new unemployment insurance claim posted their largest decline in nearly a year, indicating two key economic trouble spots are actually improving. Other reports also offered reason for optimism, with mid-Atlantic factory activity holding up well and an index of leading indicators surpassing forecasts.

The depth of the improvement renewed hope that 2011 growth will surpass last year's performance, which was not robust enough to put a meaningful dent in the nation's elevated 9.4 percent unemployment rate.

Existing home sales rose 12.3 percent to an annual rate of 5.28 million units as sellers cut prices, the National Association of Realtors reported on Thursday. Economists had only expected a rise to 4.85 million. Still, a rise in distressed sales raised questions about the rebound's sustainability.

Applications for new jobless benefits posted their largest decline in nearly a year, pointing to steady if slow improvement in the labor market. Claims retreated to 404,000 from 441,000 in the prior week, the Labor Department said.

The Philadelphia Federal Reserve Bank measure of Mid-Atlantic manufacturing showed a modest pullback to 19.3 in January from 20.8 in December, but strong underlying components. Prices paid increased sharply as global commodity prices remained high. The new orders index more than doubled while the survey's employment index, though still soft, reached its highest level since April 2006.

The Conference Board's index of leading economic indicators was up 1 percent, a number that was considerably above an expected gain of 0.6 percent.

Strength overseas appeared to be helping the United States along by increasing demand for U.S. exports, a key goal set by President Barack Obama. China finished 2010 with a bang, with a report showing GDP growth surging to 9.8 percent in the fourth quarter released just as President Hu Jintao wrapped up a state visit to Washington.

The U.S. economy has been growing for a year and a half but the pace of growth has not been enough to significantly lower unemployment, which stood at 9.4 percent in December. A weak job market could thwart housing activity further by denting consumer confidence.

That's part of the reason Federal Reserve officials, who will meet next week to discuss monetary policy, made a controversial commitment in November to purchase an additional $600 billion in government bonds to support the recovery.

The rebound in home sales came despite a bout of bad winter weather across many parts of the country last month. An increase in mortgage rates may have forced some buyers into the market by raising concern of even further increases, said Lawrence Yun, chief economist at the Realtor's trade group. Yun said he expects 2011 sales to total around 5.2 million units, with prices remaining stable.

Some economists were skeptical of the rise. Median home prices in December fell to $168,800, down from $170,200 in November and the lowest since February 2010. That was in part because properties considered "distressed" accounted for 36 percent of sales, up from 33 percent in November.

Faulty documentation in a loosely regulated housing market has led to disputes over foreclosures, creating a backlog that could flood the market with new inventory. For now, the market appeared to be making progress in reducing the stock of housing, with the available supply of homes for sale falling sharply in December to 8.1 months' worth from 9.5 months' worth in November.

Sales peaked above an annual rate of 7 million units in September 2005 as the housing bubble reached fever pitch. They hit a 15-year low below 4 million units in mid-2010 after the market collapsed, triggering a widespread financial crisis. For 2010 as a whole, sales were down 2.9 percent.