The Dow poked into positive territory Monday afternoon, led by Bank of America, as a jump in new-home sales buoyed bank stocks.
Still, the blue-chip index struggled to stay above water as worries about a record $200 billion in Treasury auctions this week and lowered outlooks from Honeywell and Aetna cast a shadow over the market.
This comes after a strong run for stocks that brought the Dow its best two-week performance since 2000.
What put the brakes on the rally today is that traders were worried about a record $200 billion of government debtflooding the market this week. It kicked off with $6 billion of 20-year TIPS, or inflation-protected securities, which had a high yield of 2.387 percent. The bid-to-cover ratio was 2.27, the highest in history.
The Treasury also auctioned $32 billion of three-month bills and $31 billion of six-month bills to decent demand as part of its routine weekly auction.
The concern is that traders are seeing signs of economic recovery, yet the government is still hauling out record debt offerings, said Jim Paulsen, chief investment strategist at Wells Capital Management.
"They're worried that, if the economy starts to pick up and the government still has to come in with such offerings, will the credit markets start to tighten up?" Paulsen observed. "What happens if the economy starts to recover? It’s one thing to raise this type of money in a recession — another thing if it’s growing," he explained.
Plus, they're worried that the impact of all this debt could cause China and other big buyers to start dumping U.S. bonds, he said.
Aetna shares skidded after the health insurer reported its profit fell 28 percent amid higher medical expenses in its commercial business. Aetna also slashed its full-year outlookfor the second time in two months.
Honeywell also fell after the diversified technology and manufacturing group hit its earnings target but lowered its full-year outlookto the low end of its previously-stated range.
That overshadowed an encouraging economic report: New-home sales rose 11 percentto an annual rate of 384,000 in June, well above the 360,000 economists had expected. The number of new homes for sale fell to its lowest level since February 1998 and the median sale price for a new home dropped 5.8 percent from May to $206,200.
Paulsen said there's a "dominance of doubt" in the market right now, where traders seize any negative news as an excuse to sell. "We would've killed three months ago for the housing number we saw today," he said.
But he still thinks it's a good time to buy stocks.
"That dominance of doubt which exists out there has got to be a bull's friend," Paulsen said. "How low can [the market] go when you have all this money on the sidelines waiting for it to go lower?" he said.
As for all the talk about earnings only being good because of cost-cutting efforts, and sales still being weak, Paulsen said people are reading too much into it.
He believes we are at the bottom of the recession and sales are exactly where they should be.
"Why would anyone expect there to be good sales growth at the bottom of a recession? There never is," Paulsen said, adding that earnings should grow from here, as they do after you hit bottom.
"I think we existed the recession last quarter," he said. "And we're going to have positive growth in the current quarter and beyond. I think we're in the recovery phase."
On the bright side, the jump in new home sales juiced bank stocks.
Bank of America was the biggest gainer on the Dow, up more than 3 percent. Regions Financial was up about more than 8 percent, and Zions Bancorp , more than 12 percent.
Of course, homebuilders also got a boost: Beazer shot up more than 13 percent, while Hovnanian and Pulte Homes gained more than 9 percent.
It's a bit less busy on the earnings front this week, though still a full schedule: About 30 percent of the S&P 500 will report this week. The highlight will likely be the oil companies.
Chevron and ExxonMobil report this week, as do ConocoPhillips and Royal Dutch Shell.
Crude oil was trading around $68 a barrel, roughly where it ended last week. Analysts expect the sharp drop in oil recently to have taken a toll on big oil profits.
The CBOE Volatility index, widely considered the best gauge of fear in the market, is now below 25 after soaring to near 80 in the fall. Goldman Sachs derivatives strategists said they expect volatility to continue to decline as much of earnings season is now behind us.
Dow component Verizon beat earnings expectations by a penny and announced plans to cut 8,000 jobs but revenue failed to keep pace with cost cutsand its shares declined.
Corning also topped earnings forecasts, citing strong demand for glass for flat-screen TVs, and said it expected that demand to continue for the rest of the year.
Corning "didn't give precise top- and bottom-line estimates for their business, but they raised their view of the overall LCD market, and I think that implies for Corning the second-half of the year should remains quite solid," Oppenheimer analyst Yair Reiner told Reuters.
Still, Corning shares fell more than 2 percent Monday after rising 10 percent in the past month.
Boeing shares fell after Barclays cut its rating on the aerospace giantto "equal weight" from "overweight," citing cost overruns on Boeing's 787 Dreamliner. Analyst Joseph Campbell said the aircraft has the potential to be Boeing's most profitable ever but delays in production of the aircraft are creating too much uncertainty. He also slashed his price target on the stock to $46 from $60.
Meanwhile, Swedish telecom Ericssonagreed to buy Nortel's wireless unitfor $1.13 billion.
In other deal news, shares of Varian soared after Agilent Technologies agreed to buy the scientific-instrument maker for $1.5 billion, or $52 a share in cash.
RadioShack reported profit of 39 cents per share that beat analyst estimates.
Still to come: Biotech giant Amgen will report after the bell.
MONDAY: $200 billion round of Treasury auctions begins; Earnings from Amgen after the bell
TUESDAY: Case-Shiller home-price index; consumer confidence; Earnings from US Steel, Viacom, Dreamworks and STMicro
WEDNESDAY: Weekly mortgage applications; durable goods; weekly crude inventories; Fed's beige book; Earnings from ConocoPhillips, Sprint Nextel, Time Warner, WellPoint Health, Visa
THURSDAY: Weekly jobless claims; Earnings from AstraZeneca, ExxonMobil, Colgate-Palmolive, Eastman Kodak, Kellogg, MasterCard, Motorola, Disney, MetLife
FRIDAY: GDP; Chicago PMI; Earnings from Chevron
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