Markets Held Hostage to Interest Rate Hikes, Apple Sinks Lower

Lack of tolerance for anything but the most rosy of pictures, aided by the strong GDP headline number, led to a broad tech stock sell-off as investors picked apart corporate earnings. Apple ended off more than 7%.

In economic news: The gross domestic product soared at 5.2% annual rate in the second quarter, much higher than the 3.5% rate predicted by economists. The GDP, a basic measurement of US economic growth, indicates a hot expanding economy. The Federal Reserveis year long spree of interest rate hikes, which was designed to cool and slow the economy, now appears to be not enough. Fear of further interest rate hikes will haunt Wall Street at least until late August when the FOMC meets again to decide rate policy.

Nevertheless, when you take the GDP headline number apart, some economists are arguing that the numbers show that the economy is really slowing down. The personal consumption price index, a measure of inflation, rose 2.3% down from the first quarteris 3.5% increase. Moreover, much of the GDP growth was stimulated by a rebound in government spending which surged 17% from -14% in the first quarter. Businesses building up billions in new inventories also contributed to the stronger-than-expected GDP.

Apple sank 3 11/16 to close at 48 5/16 on volume of 4.2 million shares. Appleis stock sold off five dollars from yesterdayis close in the first 50 minutes of the day.

The Nasdaq fell 198 points (-5.18%) to closed at 3643 on volume of 1.6 billion shares. The Nasdaq lost 10.5% or 446 points this week, the worse single week decline this year since April 10th. The semiconductor stocks (SOX) beat the down trend today to end higher, the index is up 17% year to date. Compare that to the Internet Stock Index (IIX) which is now -36% for the year to date.

Technical analysts say that no bottom for the Nasdaq is in sight, because the volume has not climbed indicating that there has been no capitulation among weaker investors. The put/call ratio is not rising which shows real complacency since when investors become worried they buy puts. That is yet another indication that there isnit enough fear to form a real bottom here.

Of course, the Holy Grail of bearish retreats for the Nasdaq would be to retrace all the way back to the 3155 low set on May 24th this year.

The Republican National Convention to choose the partyis next Presidential candidate begins on Monday.

Merrill Lynch Chief Market Analyst, Richard McCabe, made an interesting historical observation on CNBC earlier this week. When the stock marketsi aggregate opinion is for the incumbent political party to win the US presidential elections in November, the stock markets have historical climbed higher in sympathy.

Investors love the lack of uncertainty a stable government in Washington exudes, regardless of whether itis a Democrat or Republican administration. Likewise, when the stock markets feel the out-of-power party will win, the markets cautiously pull back from the unknown variable of the transition ahead.

Mr. McCabe believes the equity markets are indicating George Bush as the next US President . Finally, he points out the markets have a better track record than the pollsters do in predicting elections this far in advance.

The Dow fell 115 points (-1.09%) to close at 10470 on volume of 911 million shares. The Dow was only off about 2.0% for the week. Fear of another interest rate led to a sell-off in financial stocks and in the bond market. The defensive stocks outperformed the market, food, insurance and beverage stocks are trending higher.

The S&P 500 dropped 34.77 points (-2.40%) to close at 1414.85.

In Apple related businesses: Akamai slid 3/16 to 77 15/16. Adobe fell 2 1/8 to 111 3/8. Motorola lost 15/16 to 33 dollars. IBM climbed 11/16 to 111 1/8.

Appleis competitors: Dell lost 1 13/16 to 43 11/16. Hewlett Packard gained a buck to close at 107 dollars. Gateway was off by 2 3/4 to 55 dollars. Compaq gave back 3/4 to 28 1/8. Shares of Microsoft gained 5/16 to 69 11/16. Intel fell 7 7/8 to 129 1/8.

The Mac Observer Stock Watch Virtual Portfolio Lucent (LU) hit a new 52-week low, down 1 7/8 to 45 1/8. Our portfolio is now down about 14% since its inception in March. Thank goodness, itis not real money. ;-) If the tech stocks tank back to their May lows it will be time to back up the truck.

For full quotes on all the companies mentioned in this article, we have assembled this set of quotes at Yahoo! for your reference. For other stories regarding Appleis stock activity, visit our Apple Stock Watch Special Report.