NEW YORK (CNN/Money) -
Stocks rallied Tuesday on a technology-fueled buying spree stemming from the latest news in Iraq, but lost some of their mojo by the close after a surprise decision by Congress to cut President Bush's tax cut in half.
The Dow Jones industrial average (up 65.55 to 8280.23, Charts) and the S&P 500 index (up 10.51 to 874.74, Charts) both closed higher, but off their best levels. However, the Nasdaq composite (up 21.23 to 1391.01, Charts) managed to retain almost all of its daily gain through the close.
On Monday, the Dow saw its worst selloff on both a point and percentage basis, and analysts said Tuesday's rally partly sparked from a bounce off oversold conditions.
Wall Street remained glued to the latest reports on the progress of war in Iraq, and the news Tuesday seemed to give traders enough confidence to buy stocks. Talk of a popular uprising in Basra, Iraq's second largest city, against the regime of Saddam Hussein, as well as the latest Saddam rumor, this time that the Iraqi leader is negotiating a surrender, seemed to give the rally legs throughout the early afternoon.
But news that the Senate reversed course and decided to cut more than half of President Bush's proposed $726 billion tax cut took investors by surprise, reminding them that beyond the war, the impact of a weak economy and sluggish corporate spending remains. In addition, analysts have said that the reduction makes a dividend tax cut almost impossible.
"This has really become a spectator sport. When your team is up everyone is in the stands cheering and when your team is down, people are on the sidelines," said Ram Kolluri, chief investment officer at Global Value Investors. "But euphoria about the war going right and depression about it going wrong represents a very short-term view of the market."
"What concerns me is that the weakness in equity markets predates the war. The travel industry is having major problems, natural gas prices remain stubbornly higher and earnings growth has been very sporadic," Kolluri added. "The war is going to be a much longer and more involved process than people think. We are going to be under the gun, even when the conflict itself is over. If we don't see a dramatic recovery in earnings and a drop in oil once the conflict ends, these rallies that we have now won't be meaningful."
Although likely to be overshadowed amid the war focus, Wednesday brings economic reports on durable goods orders and new home sales. February durable goods orders are expected to fall 1.5 percent after rising 2.9 percent in January. New home sales are expected to rise to a 927,000 unit annual rate in February from a 914,000 unit annual rate in January.
Investors look to war
Over the course of the past three months, Wall Street's emotions have run from fear of war and the uncertainty it could bring to euphoria once the war started and victory seemed to be only a matter of days, back to uncertainty when it turned out the war could be protracted and costly, and, finally, to a knee-jerk rally Tuesday on the latest signs of progress.
"This is an overall contrarian type of bounce. Yesterday's big selloff brought out an onslaught of nervousness, so you've got a lot of people who sold rushing in to cover positions," said Peter Green, market analyst at MKM Partners.
Stocks sold off sharply Monday, with the Dow shedding 3.6 percent, or more than 300 points, after news from Iraq over the weekend indicated U.S. forces were encountering resistance and the war could go on longer and prove more difficult to win than Wall Street had hoped.
But Monday's selloff came on the heels of the best week the market had seen in more than 20 years. This advance, which carried the Dow about 1,000 points higher over the course of eight trading sessions, was based on the belief that once the war started, it would be quick and victorious.
In the weeks preceding the rally, Wall Street had been subjected to a process of slow bleeding that took stocks close to their lowest levels in four years. War, again, was the reason behind the decline, but this time it was uncertainty about whether one would be fought, when, and how long it would take.
"War news is having a fingernail-biting impact generally," MKM's Green added. "Right now, there's a sense of people not wanting to do much until the troops get to Baghdad, which could happen in the next day or two. But there's also the hope of some sort of diplomatic resolution before this situation becomes a runaway train. I don't think either side wants to see this prolonged."
Wall Street's war obsession even managed to distract investors from the market's other headache -- the sickly state of the U.S. economy. Tuesday's reports brought an expected decline in consumer confidence and a drop in existing home sales. Stocks barely budged on the news. The war noise has been so loud recently, that even the Federal Reserve last week declined to offer an outlook on the economy, saying the war made it too difficult to make reliable forecasts.
Techs maintain their lead
Although the Dow lost a large chunk of its gains on the tax cut news, the Nasdaq managed to hang on to most of its earlier rally, thanks to broad-based nibbling in a variety of technology sectors.
Shares of Oracle (ORCL: up $0.27 to $11.30, Research, Estimates) gained 2 percent and JDS Uniphase (JDSU: up $0.09 to $2.92, Research, Estimates) gained 3 percent in active trade.
Of the 30 stocks that trade on the Dow, 25 closed higher. Home Depot (HD: up $0.73 to $25.11, Research, Estimates) and J.P. Morgan (JPM: up $0.51 to $24.14, Research, Estimates) were the biggest advancers.
Airlines were active on a war play. Their stocks rose after Senate Majority Leader Bill Frist, R-Tenn., said Tuesday he thought Congress would authorize aid for the struggling industry. The comments provided a salve after Monday's White House proposal for emergency funding to pay for the war did not include any aid to airlines.
American Airlines' parent, AMR (AMR: up $0.17 to $2.25, Research, Estimates), was one of the NYSE's most active issues, up 8 percent, while Northwest Airlines (NWAC: up $0.72 to $8.08, Research, Estimates) gained almost 10 percent.
On the downside, shares of Dow stock American Express (AXP: down $1.09 to $35.26, Research, Estimates) lost 3 percent after Merrill Lynch trimmed its 2003 earnings estimate for the company, citing a slowdown in billed business growth as consumers spend less on air travel, lodging and other non-essentials due to the war.
Dow stock Hewlett-Packard (HPQ: down $0.04 to $16.51, Research, Estimates) managed to recover most of its losses by the close. The stock had been down as much as 4 percent on competitive worries after rival Dell Computer (DELL: up $0.32 to $28.13, Research, Estimates) unveiled its own brand of printers and ink cartridges, both key components of HP's business.
Market breadth was positive, with rising stocks edging ahead of decliners by more than 11 to 5 on the New York Stock Exchange and almost 2 to 1 on the Nasdaq. Some 1.32 billion shares traded on the NYSE, and 1.39 billion shares changed hands on the Nasdaq.
U.S. Treasury bonds flattened out after zigzagging throughout the session on the stock market swing. The benchmark 10-year note added 4/32 of a point in price, pushing its yield down to 3.95 percent. The dollar fell against the yen and was flat versus the euro.
Oil reversed course, turning lower. Light crude for May delivery fell 69 cents to $27.97 a barrel in New York. Gold turned lower, falling $1.20 to $328.30 an ounce in New York.
World stock markets were mixed, with Asian stocks closing mostly lower overnight and European issues closing mostly higher.