The Dow Industrials were hit yesterday with the second straight loss as investors again focused on the Fed and its quantitative easing policy. Even a drop in the dollar and better economic reports failed to rally the Dow, but both the S&P 500 and Nasdaq closed slightly higher.

Initial employment claims fell by 21,000 to 434,000 in the week ending last Saturday. The Street had expected claims would rise by 3,000. Manufacturing activity in the Federal Reserve Bank of  Kansas City’s district expanded but at a slower rate than in September.

And the list of companies that reported better-than-expected earnings continues to grow:  Akamai (NASDAQ: AKAM), Visa (NYSE: V), Colgate-Palmolive (NYSE: CL), Norfolk Southern (NYSE: NSC), Las Vegas Sands (NYSE: LVS), Noble Energy (NYSE: NE), Zimmer Holdings (NYSE: ZMH), Motorola (NYSE: MOT) and Dow Chemical (NYSE: DOW) all produced better earnings, but many had revenues that didn’t match expectations.

Treasurys rose, pushing the 10-year yield down to 2.659%. And the dollar fell in response to spreading lower expectations from the Fed’s QE2 plan. The euro closed at $1.3929 vs. $1.3768 on Wednesday.

At the close the Dow Jones Industrial Average was off 12 points to 11,113.95, the S&P 500 gained one point, closing at 1,184 and Nasdaq gained 4 points at 2,507. The NYSE traded one billion shares with advancers slightly ahead of decliners. Nasdaq crossed 540 million shares with decliners ahead by 1.36-to-1.

Crude Oil for December delivery rose 24 cents to $82.18 a barrel, and the Amex Energy SPDR (XLE) fell 13 cents to $59.20. December Gold jumped $19.90 to $1,342.10 an ounce, and the PHLX Gold/Silver Index (XAU) fell $5.07 to $201.60.

What the Markets Are Saying

The stock market’s falling momentum, which may be due to the Fed’s feelers of a lesser response to QE2, is now causing some technical issues. Finally, rather than just being overbought, our internal indicators have each flashed short-term sell signals. This is mainly because the extremely sharp, straight-line advance from the late August lows is faltering and prices are beginning to roll over in response to the overhead of sellers that reside at the April highs.

The bulls will no doubt be quick to point out that the S&P 500 is still strong, successfully holding above its first support line at 1,174, and the Dow has held above 11,000. This is true but slowing momentum is not what the bulls need at a crucial area of resistance.  And combined with other indicators (see yesterday’s Daily Market Outlook), falling momentum is more than just a hint of problems with the rally but a graphic representation of a new direction — and it is down.

But cheer up! The new direction that I’ve described is not a permanent change of trend but a mere alert that a rest is due. The fact is that a rally with an angle up that is as steep as this just can’t be sustained. A rest will most likely take the form of a mild correction first to the support on the S&P at 1,175 and then a retreat to 1,150 and perhaps even to 1,130 before stabilization occurs. 

Declines of this nature are quite common and normally take a month or two to resolve. Jan. 2 to Feb. 8 and Aug. 6 to Sept. 1 are examples of normal corrections. And so if you are a bull it may be time to just cool your well-worn hooves after a dash that lasted for almost two months and enjoy the upcoming holidays. 

Today’s Trading Landscape

For earnings to be reported today, click here.

Economic reports due: GDP (the consensus expects 2.0%), Employment Cost Index (the consensus expects 0.5%), Chicago PMI (the consensus expects 57.6), Consumer Sentiment (the consensus expects 68.0) and Farm Prices.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.