Surging Oil Prices, Rising Bond Yields Pull Stocks Down

The stock market pulled back a bit Wednesday after Tuesday’s strong rally, as some investors may have been distracted by rising bond yields and a surge in oil prices.

But the speculative tone in the Nasdaq market remained extraordinarily high--as shown by record trading volume and by wild trading in China-related stocks.

The Dow Jones industrial average slid 49.24 points, or 0.5%, to 10,883.09 after rocketing 171.58 points on Tuesday.

The Nasdaq composite gave up 0.8% to 3,269.39 after soaring 2.3% in Tuesday’s rally. The big news was the outrageous volume: a record 1.65 billion shares, topping the previous record of 1.496 billion just set on Tuesday.

Unlike on Tuesday, the automated Nasdaq system didn’t crash late Wednesday.

The market euphoria Tuesday was rooted in the widespread belief that the Federal Reserve, after raising short-term interest rates for a third time this year, will most likely be on the sidelines for the next two months or so.

But that sense apparently didn’t pervade the bond market on Wednesday: Longer-term yields moved higher for a second day.

The benchmark 30-year Treasury bond ended at 6.13%, up from 6.06% on Tuesday and the highest since Nov. 3.

Some bond traders expressed disappointment with the October consumer inflation report on Wednesday, which showed prices up 0.2%. Inflation overall remains relatively low, but the bond market’s paranoia over possible future inflation may be second only to the Fed’s.

The action in the oil markets didn’t help matters: Near-term crude oil futures in New York zoomed 90 cents to $26.60 a barrel, the highest since January 1997.

A few more dollars and we’ll be at levels not seen since the 1991 Gulf War.

The American Petroleum Institute said late Tuesday that U.S. oil inventories fell 2.49 million barrels to 308.97 million in the latest survey, amid surprisingly strong demand for gasoline.

Also affecting prices Wednesday: The latest Caribbean hurricane forced Amerada Hess to shut the Western Hemisphere’s second-biggest refinery, situated in the U.S. Virgin Islands.

Inventories “are going down fast,” Ken Haley, manager of energy forecasting at Chevron Corp., noted on Bloomberg News.

Still, it’s unlikely that anyone trading China-related stocks on Nasdaq on Wednesday was paying any mind to oil inventories. The action in those stocks--which in at least one case turned a penny stock briefly into a $29 stock--helped swell Nasdaq trading volume.

The China stocks’ gains were almost certainly the work of individual speculators; most institutional investors can’t play in such thinly traded stocks.

The heavy involvement of individual investors may be helping Nasdaq in general: Losers topped winners by just 21 to 19 on Nasdaq on Wednesday, while losers had a 3-to-2 edge on the New York Stock Exchange.

Strength in smaller stocks in general pushed the Standard & Poor’s small-cap index up 0.2%, while blue-chip indexes eased.

Among Wednesday’s highlights:

* Energy stocks soared with crude prices. Chevron leaped $3.56 to $96.56, Baker Hughes surged $1.88 to $29.13, Total Fina gained $3.38 to $71.63 and Anadarko Petroleum rose $2.63 to $35.44.

* What was good for oil companies was bad for airlines, however, as investors focused on the potential for higher fuel costs.

AMR, parent of American Airlines, fell $2.44 to $60.38, Delta dived $2.31 to $49.88 and UAL, parent of United, slid $1.63 to $66.19.

* Financial stocks, stars of Tuesday’s post-Fed rally, suffered profit-taking on Wednesday. Morgan Stanley Dean Witter dropped $5.81 to $121.44, Charles Schwab slid $4.06 to $41.94 and Citigroup was off $1.63 at $56.38.

* Tech-stock leaders took a break. Intel fell $1.81 to $74.75 after repeating that fourth-quarter computer chip demand is exceeding the company’s ability to produce.

Also falling: Microsoft, down $2.31 to $85, its lowest closing price since Aug. 20; Gateway, down $4.25 to $78.13; and Texas Instruments, down $5.94 to $94.94.

* The Internet sector was mixed. America Online lost $4.38 to $155.63 and DoubleClick fell $9.06 to $154.50, but Inktomi rose $6.50 to $131.25.

Market Roundup, C9