No Follow-Through off Big Rally

Stock indices spent the better parts of Tuesday wallowing in the red, and with the exception of the NASDAQ, all closed lower.

Dow 14,047.31 -40.24; NASDAQ 2,747.11 +6.12; S&P 500 1,546.63 -0.41; NYSE Composite 10,175.66 -8.84

Essentially, since the declines were so marginal, little can be gleaned from Tuesday's session, except that investors are not exactly solid in their positions. Some wizened veterans of Wall Street say the 4th quarter kick-off rally was funded mostly through fresh 401k money, put to use by various fund managers who have nothing better to do than add to already overbought positions in an attempt to goose prices higher.

If anything, this market is short-term, with a very limited view of market history. If the credit market unraveling of August is prelude and already forgotten, the "irrational exuberance" of 1999-2000 is prehistoric. One can almost sense the desperation in the headlines, suggesting that traders will swap a weak economy for more fed funds rate cuts. That kind of thinking is a sure symptom of short-sighted trading, as is buying near or at tops.

By now, you've probably discerned that I am not particularly encouraged by any Wall Street euphoria since it is being built on the backs of a weakened economy and tumbling US dollar.

Internals were once again bullish, however, with advancers beating decliners by a 3-2 margin. New highs beat new lows, 366-120. Both margins were significantly slimmer than yesterday, though that is expected.

Oil continued it's week-long decline, falling well below the absurd $80 threshold before rallying back to close down just 19 cents at $80.05. Gold and silver profits were trimmed, if not slashed and burned, with gold losing $17.80 to $736.30 and silver declining 41 cents to $13.45.

The moves in the metals are of particular interest. The last time they fell in tandem by such a large amount was last month, at the height of the mad cash scramble prompted by the ongoing credit squeeze.

There's a safe bet that some of the selling in the metals was credit-related, as that nasty little problem may have been swept under the rug for now, but is beginning to smell.

What will be interesting is how the major banks handle the massive writedowns for the mortgage mess in their third quarter reports. The largest banks, including Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), Wachovia (WB), Washington Mutual (WM) and Wells Fargo (WFC) all report between October 15 and 19. That's just two weeks away and investors should expect some serious fallout. Citigroup already warned that profits would be cut by more than 60%. None of the others have yet to show such bravery, though some word is sure to slip out sooner rather than later.

When one or two of these drop a bomb on the market, expect some serious reconsideration in trading strategy for the remainder of the quarter. Most mainstream stocks won't be adversely affected, though some strain will surely be showing as we wend our way toward the holidays.

October can be a vicious month for stocks. Ask anybody who was around in 1929.