Wall Street kept its "glass is half empty" outlook last week, with the Dow losing 148 points on Friday and most signs of optimism.
"The market is choosing to look at the negative side of things now," says Greg Nie, chief market technician at Everen Securities Inc. of Chicago.
Investors seem eager to grasp any sign of rising inflation and use it as a reason to sell.
Case in point: On Friday, April 11, Washington released two new economic reports. The producer price index, which measures wholesale inflation, fell 0.1 percent in March.
But Wall Street focused instead on the core rate of inflation, which excludes food and energy. It rose 0.4 percent after falling in February.
Also, the retail sales gain for March was weaker than expected. But the markets read between the lines - without car sales retail gains looked strong.
Stocks in bondage
The Dow Jones industrial average skidded 148.36 points on Friday, losing 134.38 points for the week.
That bodes poorly for this week.
"We're going into [this week] with a lot of weakness," says Mr. Nie. "Everyone's going to be worried about the consumer price index," reported tomorrow. The CPI measures inflation in consumer prices.
"For the time being, stocks are hostages to bonds," says Nie.
Yields on bonds rise as inflation eats away at their value. And when rates on the 30-year Treasury bond rise, stocks generally fall.
And those bond rates poked above critical levels last week. Friday, the yield on the long bond rose to 7.16 percent. "A number like that makes bonds very, very attractive compared to stocks," says Nie.
"The market is clearly saying that the economy has been too strong and has to be reined in," says Larry Wachtel, a vice president of Prudential Securities.
"Over the course of the past 28 months" the Dow pushed to lofty levels, he says. "We're now paying the price of that excess."
And a stiff price it is. The Dow now sits in negative territory for the year, off about 10 percent from its high on March 10.
And for the first quarter, mutual funds that invest in US stocks lost ground, a first-time experience for many investors.
More losses may follow. Sung Won Sohn, an economist at Norwest Corp. in Minneapolis, says he expects tomorrow's CPI to show higher core inflation, prompting a rate hike when Federal Reserve policymakers meet May 20. He expects another, moderate, increase in July.
On the positive side, that should quell inflation, he says.
And some analysts expect a surge of money into stocks this month, as investors fund individual retirement accounts before tomorrow's tax deadline.
In addition, many investors may take their tax refunds and park them in the stock market.
Or not. These same investors now seem wary of Wall Street.
In March, when the market turned negative, they slashed their new investments in stock mutual funds almost in half, to $9.5 billion, from February, says the Investment Company Institute in Washington. That's the slowest pace in eight months.