Greenspan Sparks a Rally, but Stocks Give Back Most of Their Gains

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Fed Chairman Alan Greenspan

didn't look exu-- uh, ebullient at his

Joint Economic Committee

testimony

this morning, but he certainly seemed enough at peace with the financial world to spur a pop in both bonds and equities.

Greenspan made the usual noises about the need for inflation vigilance and expressed his usual disdain for complacency, but he added some comments that aimed straight for Wall Streeters' nervous hearts -- and lifted them.

The chairman said the Monday "market event" (in Abby Joseph Cohen's term) may come to be seen as a good thing for the macroeconomy, just like the 1987 crash. "Today's economy, as I have been suggesting of late, has been drawing down unused labor resources at an unsustainable pace, spurred, in part, by a substantial wealth effect on demand," he said. "The market's net retrenchment of recent days will tend to damp that impetus, a development that should help to prolong our six-and-a-half-year business expansion."

Greenspan also added some optimistic musings on Asia, including the observation that "there is no reason that above-average growth in countries that are still in a position to gain from catching up with the prevailing technology cannot persist for a very long time." He summed up thus: "The financial disturbances that have afflicted a number of currencies in Asia do not at this point, as I indicated earlier, threaten prosperity in this country, but we need to work closely with their leaders and the international financial community to assure that their situations stabilize."

"I have it on, but I've been too busy to listen," said Warren Epstein, head trader at

Richard A. Rosenblatt

in New York, as Chairman Alan droned on in the background. "The market's come back very quick, very far, and I wouldn't be surprised to see some profit-taking come in later. I'm really more watching the bonds, and they seem to be holding up well."

The market reaction came swiftly after the 10 a.m. EST release of Greenspan's remarks, and the

Dow Jones Industrial Average

peaked before 11 a.m. at 7621.60, up 123.28. The blue-chip index has since given back most of that surge, but at noon it was hanging onto a gain of 14 to 7512. The

Nasdaq Composite Index

was up 3 to 1606 and the

S&P 500

was off about a point to 921. The bond market indeed held up fine, with the benchmark 30-year Treasury up a full point in price to yield 6.22% at midday.

Larry Rice, chief market strategist at

Josephthal Lyon & Ross

, was far from bowled over by Greenspan's words and their implications. "I don't think there was anyone in their right mind expecting them to raise interest rates anyway," he said.

Rice also saw little to worry about in the seeming failure of the Dow to hold above its 7600 resistance level. "I don't think any of these numbers mean anything when you get into an emotional situation like this," he said. "It's conceivable that we could shoot all the way back to 7800 or 8000 again. If we get back to 8000, we'd be dealing with record multiples again, and you don't want to see that happen in two days."

Gail Dudack, market strategist at

UBS Securities

, doesn't expect to see that happen at all. In a brief summary note from the firm's morning meeting, Dudack stood firmly in the bear's den. "We do not believe the correction is over and still see DJ 6300 ahead," she wrote. "Yesterday's rally was due to a deeply oversold market, short covering, and several buy programs.

"DJ 7600 is obvious resistance and Friday's close of 7715 should be a ceiling for 6 months," Dudack went on. "This is a time not to add aggressively to stock weightings, but to switch into telephones, REITs, energy, and utilities."

Some of Wall Street's most prominent strategists are taking the other side of that bet, however, so the who's-right? watch is in full effect. Yesterday, Cohen of

Goldman Sachs

upped her recommended equity weighting to 65% from 60% and trimmed cash to 5% from 10%, keeping bonds at 25% and commodities at 5%. (

As originally published, this story incorrectly said Cohen was keeping cash, not bonds, at 25%.

) Today, Byron Wien of

Morgan Stanley Dean Witter

lowered cash to 8% from 10% and upped the recommended stock weighting. He wasn't immediately available to confirm the exact figures.