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Markets Take a Breather After 3-Day Rally

Fin - Breakout - US

Markets took a breather Tuesday, as oil prices rose amid continued unrest in Libya and the Middle East. The Dow, which traded in a 50-point range all day, lost about 18 points in the session to close at 12,018.63. The S&P continued to resist 1,300, falling about 4 points to close at 1,293.77; the Nasdaq shed about 8 to end at 2,683.87.

Individual moves of note were with Walgreens, (WAG) which dropped more than 6% after margin contraction led to weak 2Q results. WAG is always a tale of two businesses -- the pharmacy biz, which is largely a market share grab and has somewhat fixed profits, and the retail operation that customers walk through on their way to getting prescriptions filled.

It was Walgreens' latter business, which sells an endless array of cheap items, that came under pressure as merchandise costs rose and margins contracted. Why should traders care? Because Nike (NKE) told us the same thing about margins, and also promised to raise prices. You should also care because the Producer Price Index, one of the select pieces of government data that actually matters, came in hotter than expected last week.

Corporate profit margins are at an 18-year high. Input costs are going up, leaving corporations the option of hiking prices in a lousy economy or leaving prices static and letting margins drop. The higher input costs can now be assumed as a given; whether this hits America in the wallet or the portfolio remains to be seen.