The Dow's Big Tease

The blue-chip benchmark traded above 14,000 and then pulled back below the milestone in the last minutes of trading Tuesday

Market watchers were tantalized Tuesday as the blue-chip Dow Jones industrial average appeared ready to close above the 14,000 level for the first time. With only minutes to go in the trading session, the average was sitting at an all-time high of 14,021.95, but a bout of late selling sent the average back below the big round number.

What happened? Chris Burba, a technical market analyst for Standard & Poor's, thinks investors got a case of last minute nerves. "It's common for the first test of any big market milestone like Dow 14,000 to attract sellers," he says.

If it's any consolation, the Dow did post a record closing high on Tuesday, adding 20.57 points, or 0.15%, to 13,971.55. The average did reach above 14,000 early in the session before pulling back below that level foe most of the day. The broader S&P 500 index was basically flat, down 0.15 point, or 0.01%, to 1,549.37. The tech-heavy Nasdaq Composite index was the best performer of the major indexes on the session, rising 14.96 points, or 0.56%, to 2,712.19.

Burba also pointed to another factor that could explain the late-day pullback. With the monthly expiration of options and futures at the end of the week, volatility tends to pick up on the preceding Tuesday and Wednesday. In addition, "we've had some nice advances in the past five days, so it's not surprising to see some profit taking," he says.

Todd Salamone, senior VP of research at Schaffer's Investment Research, says that there are still positive fundamental factors that could finally push the Dow to a close over 14,000. In addition to the prospect of more favorable news on corporate earnings, the unwinding of put options, or negative bets on stocks, could boost major indexes as investors buy shares to cover their bets.

Investors have been bidding stocks higher despite some worrisome factors: Concerns that the subprime loan mess could cause damage to credit markets, higher interest rates, and a new spike in the price of oil to well over $70 a barrel.

Indeed, Salamone says he is intrigued that major indexes have been able to advance despite an abundance of caution on the part of investors. He notes that while the S&P 500 index has risen about 9% so far this year, the VIX volatility index, widely regarded as a "fear gauge" for the stock market, has risen about 30%.

While the Dow 14,000 drama plays out Wednesday, investors will also be focusing on other matters like corporate earnings and Federal Reserve chairman Ben Bernanke's two-day testimony before Congress starting on Wednesday.

After the close of trading Tuesday, marquee tech names Intel (INTC) and Yahoo! (YHOO) released results. Big names like Abbott Laboratories (ABT), Allstate (ALL), eBay (EBAY), Pfizer (PFE), and Southwest Airlines (LUV) were scheduled to report results Wednesday.

Before the start of trading Wednesday, investors will get a read on inflation with the release of the June consumer price index.

Fed chairman Bernanke is expected to focus on inflation as the biggest risk to the U.S. economy in his testimony. The question-and-answer period that follows could get interesting, though, as legislators may grill the Fed chief on the possible effects of the subprime loan meltdown. Bernake could also be pressured on banking regulation by Democrats, according to a Wall Street Journal article that suggests the Fed has been accused of being lax in protecting consumers against unscrupulous banking practices.

Before the late-session caution took hold on Tuesday, earlier strength in stocks was driven by an upgrade of Dow component American Express Co. (AXP), some strong earnings reports, and a fresh batch of M&A news.

A better-than-expected industrial production report also stoked investor enthusiasm.

In economic news Tuesday, the producer price index dropped 0.2% from May with the help of lower energy and food prices, while the core rate rose 0.3%. This is the first time that wholesale prices have retreated since January. Economists were looking for the PPI to come in 0.1% higher and for the core number to rise 0.2%. But observers say the headline figures are deceptive, given that gasoline prices were shown to have fallen 3.9% in June, while consumer food prices were down 0.8%.

The U.S. industrial production report for June came in 0.1% short of expectations at 0.5%, down 0.1% from May but up 0.2% from March, leaving the index right in line with assumptions, according to Action Economics. The index showed production growth of 2.9% for the second quarter, versus an upwardly revised 1.1% pace in the first quarter and 1.5% rate of contraction in the fourth quarter of 2006. Capacity utilization edged up to 81.7% from 81.4% in May. The industrial production index is in sync with second-quarter Gross Domestic Product growth, which Action Economics pegs at 3.4%. Industrial production is on track for a growth rate of 3% to 3.5% in the third quarter.

The U.S. NAHB homebuilders' survey index plunged to 24 in July, the lowest level since January, 1991. This extends the losing streak to five consecutive months as a glut of inventories on the market continues to weigh on sentiment, notes Action Economics.

In the energy markets Tuesday, August WTI crude fell 13 cents to $74.02, down from its $75.35 high, as August options expired. September Brent crude fell 68 cents to $75.61 on the ICE. Some analysts, such as Citigroup's Tim Evans, see a crude oil shortage in the fourth quarter unless OPEC rescinds its quota cuts in near future.

Among stocks in the news Tuesday, American Express was up after Goldman Sachs upgraded the stock to buy from neutral after the market close on Monday. Goldman Sachs' research note said the company's core credit-card network business is undervalued compared with rivals Discover Financial Services (DFS) and MasterCard (MA), and raised its target price to $77 from $66 a share.

News Corp. (NWS) was up higher after reaching a tentative agreement for the purchase of Dow Jones & Co. at its original $5 billion offer price, according to the Wall Street Journal's online edition. The deal will be put to the full Dow Jones board Tuesday evening for approval, but the Bancroft family, which controls 64% of the company's stock, is said to still be wavering on the deal.

Johnson & Johnson (JNJ) reported a 9% increase in second-quarter earnings to $3.08 billion, or $1.05 a share, from $2.82 billion, or 95 cents a share, a year earlier. The results exceeded Wall Street's forecast of $1.00 a share. The health care products maker's acquisition of Pfizer's consumer health products line helped boost total revenue by 13%. The stock was lower Tuesday.

Consolidation in the energy sector resumed with news that Pogo Producing Co. (PPP) agreed to be acquired by Plains Exploration & Production (PXP) in a stock-and-cash deal valued at $3.6 billion. Pogo shares surged on the news.

Less than a week after losing Huntsman Corp. (HUN) to a higher bidder, privately owned Basell, owned by Access Industries, agreed to buy Lyondell Chemical Corp. (LYO) for $19 billion, including more than $6 billion in debt. The price is a 45% premium to Lyondell's closing price on May 10 when talk of a takeover first surfaced.

The Coca-Cola Co. (KO), the world's largest beverage maker, posted a 1% rise in profit to $1.85 billion, or 80 cents a share, compared to $1.84 billion, or 78 cents a share, a year ago, on a 19% jump in sales. Excluding one-time items, Coke's results beat analysts' expectations of 82 cents a share by three cents.

Specialty chemicals maker Rohm & Haas (ROH) announced a $2 billion stock buyback, which represents 15% of its market capitalization. The stock soared to a record high of $62.54 before retreating a bit. Citigroup upgraded the stock to buy from hold..

European stock markets finished lower on Tuesday. In London, the FTSE 100 index was down 0.58% to 6,659.10. Germany's DAX index fell 0.83% to 8,038.21. In Paris, the CAC 40 index was off 0.43% at 6,099.21.

Asian markets traded mostly higher on Tuesday. In Japan, the Nikkei index was off 0.12% to 18,217.27. In Hong Kong, the Hang Seng index was up 0.45% to 23,057.30. In China, the Shanghai Composite index climbed 1.94% to 3,896.19.

Treasury Market

Treasuries closed lower in price Tuesday, pressured by a larger rise in June core PPI than expected. Firm June industrial production and capacity utilization contributed to the bearish backdrop for bonds. The 10-year note fell 07/32 in price to 95-21/32 for a yield of 5.07%. The 30-year bond tumbled 14/32 to 93-28/32 for a yield of 5.15%.

Traders will focus on the start of Bernanke's two-day testimony before Congress on Wednesday.

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