DOW Jones down sharply for second day

Apparently investors have been looking at the recent reports of trouble in the mortgage market and have suddenly decided to ignore the politically motivated "Great Economy! Rah! Rah! Rah!" that has been coming out of Washington, D.C.

From the Associated Press by way of Yahoo Financial News:

Thursday July 26, 4:22 pm ET
By Joe Bel Bruno, AP Business Writer

Stocks Plunge on Lending Worries, Dow Industrials Plunge More Than 300 Points

NEW YORK (AP) -- Wall Street suffered one of its worst losses of 2007 Thursday, leading a global stock market plunge as investors succumbed to months of worry about the mortgage and corporate lending markets. The Dow Jones industrials closed down more than 310 points after earlier skidding nearly 450.

Investors who had been able for months to largely shrug off discomfort about subprime mortgage problems and a more difficult environment for corporate borrowing finally decided it was time to sell after the Commerce Department issued another disappointing home sales report.

Feeding the plunge were concerns that higher corporate borrowing costs will curb the rapid pace of takeovers that had driven stocks higher this year. Investors also feared the sluggish environment for home sales and continued defaults in subprime loans would spur debt defaults and weigh on corporate earnings.

While stocks plummeted, investors poured money into the safe haven of the bond market. The soaring price of Treasurys pulled yields lower, and the rate on the 10-year note plunged to 4.79 percent from late Wednesday's 4.90 percent.

"Worries that have been out there for the past couple of years are coming to a head right now," said investment strategist Edward Yardeni, president of Yardeni Research Inc. "It's show time."

The fact that the economy is not too stable is not surprising news, but the recent reports of trouble have all come at the same time.

"Wall Street continues to walk a wall of worry," said Ryan Larson, a senior equity trader at Voyageur Asset Management. "The housing market continues to be a story, and nobody knows when it will rebound. But, the real concerns are about credit and oil pushing higher."

Also stunting stocks was the Commerce Department's disappointing durable goods report. Though sales of big-ticket items increased by 1.4 percent last month to a seasonally adjusted $217.07 billion, durable goods excluding transportation equipment had an unexpected drop.

The Labor Department reported that jobless claims fell by 2,000 to 301,000 in the week ended July 21, slightly better than analysts' expectations.

Investors also reacted negatively as oil prices climbed to almost $77 per barrel during the session, stoking the market's worries about inflation. However, crude pared gains in the afternoon when a barrel of light sweet crude fell $1.23 to $74.95.

The stock market moves largely based short term reaction to new reports. That is what we are seeing here. The theory is that anything that is a long-term prediction for the market is already built into the market behavior, so short term moves do not create a long term trend. But the lack of large, sudden movements of the market can also indicate that the short-term traders are failing to recognize long term changes that will go against them. A sudden flurry of mostly negative reports from different sectors of the market will create a short term drop like the one we have seen yesterday and today, but the drop itself signals that a lot of people need to get their heads up out of day-to-day trading and look at the longer term trends.

We have just seen the short term market reaction (and very likely will see more Friday) but we have not yet seen the results of reexamination of long term economic trends. We may see example of those longer term evaluations on the market after the weekend.

I can't say that I see the longer term prospects for the market are going to look especially attractive, but I'm just one person with the limited information I can find, limited time, and other interests. Now that the market has gotten the interest of the professionals, they are parking their investment money in less risky locations (the bond market) and we are going to get some idea of what the longer term prospects for the money-makers and money-lenders really are when they have begun to decide what, if anything, has changed. They are right now collecting information from sources they don't look at on a day-to-day basis, and over the weekend they are going to be discussing those results among themselves. That's why I think the first real indicators of how they will invest their money will really start after the weekend.

My personal bet is that the increasing stock market is over for a while. But that is only a bet, not sure knowledge. I don't like the long-term trends, but I have no clue right now whether the short-term traders will try to build a rally or will try to get their money to safer locations. That is psychology more than economics.

We'll begin to get real hints early next week. Tomorrow is almost certainly further down as more money goes to less risky locations. But as I say, that is my bet, not my certainty.