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Equity optimists got just about all they could ask for Thursday, including stabilization in Treasuries, better-than-expected economic data and mainly strong retail sales reports. The reaction in stocks was positive, albeit modestly so.

Major averages struggled early on despite a stronger-than-expected report on second-quarter productivity and another drop in weekly jobless claims, including the closely watched four-week moving average, which fell below 400,000 for the first time since February. A 4.6% rise in same-store sales at



and solid results from other retailers, including

Best Buy


, also failed to inspire buyers at the opening.

Despite the positive news flow, equity traders were nervously anticipating the Treasury's $18 billion of 10-year notes, further evidence of the fixed-income spell under which equities have recently fallen.

Stock proxies had already started to recover from their early lows when the auction results were announced at around 1 p.m. EDT. At just over 2.0, the bid-to-cover ratio -- a measure of demand for the 10-year notes -- was slightly below the average since 2000 but well above levels of the most recent auctions, including 1.22 for the 10-year last May. Treasury prices actually weakened in the auction's aftermath, although not dramatically, and then recovered to end higher. The benchmark 10-year note settled up 13/32 to 95 10/32, its yield falling to 4.21%.

Equity traders took the Treasury market's relatively subdued reaction to the auction and subsequent rally as a reason to bid stocks higher for much of the afternoon, ending not far from session highs.

After trading as low as 9031.14, the

Dow Jones Industrial Average

traded as high as 9135 intraday before closing up 0.7% to 9126.45. The

S&P 500

ended up 0.7% to 974.12 vs. its apex of 974.89 and nadir of 963.82. The comeback aside, the index failed to rally above 975, a level many traders remain fixated upon.

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"Above that you have to go long," said one institutional trader, who suggested that such a move would indicate that the market's recent slide was a false breakdown of the prior trading range. "I'd be amazed if we got above 975, but if we do, there will be more furious

action to the upside."

The trader, who requested anonymity, is net long the index but shorting other names as the S&P gets closer to 975, as a hedge in case that push doesn't come.


Nasdaq Composite

repeated its recent trend of underperformance, although with far less significance than on

Wednesday, ending down fractionally to 1652.20 vs. its intraday high of 1658.40 and low of 1641.70.

Strength in retailers provided a boost to blue-chip proxies; Wal-Mart gained 2.3% and Best Buy rallied 14.3%, helping the S&P Retail Index climb 1.6%. Other leaders include recently bedraggled HMOs such as

Tenet Healthcare


, and there was broad strength in biotech and gas-related energy names as well.

The Comp was restrained by big percentage declines for smaller components such as

XM Satellite Radio





, as well as weakness in semiconductors. The Philadelphia Stock Exchange Semiconductor Index fell 0.5% to 380.53, ending below its 50-day moving average of 381.43.

At 1.4 billion on the

Big Board

and 1.6 billion over the counter, volume was in line with recent levels, while breadth favored gainers 5 to 3 in the former and decliners by 8 to 7 in the latter.

Bonds Away

The equity market's intense focus on Treasuries was evinced by the scuttlebutt about various central banks bidding to ensure a successful auction.

On Wednesday the

Federal Reserve

bought $3.35 billion of the $18 billion five-year note auction on behalf of other central bankers,

The Wall Street Journal

reported. The Fed bought $2.5 billion of Thursday's 10-year auction, its highest amount since at least 1988, according to Tony Crescenzi, chief bond market strategist at Miller Tabak and a


"That might be evidence foreign central banks participated. The problem is, nearly all of the money

represents a rollover of the Fed's own money, not new purchases," Crescenzi said. "I don't think there was any effort to prop up the

Treasury market. Not by any means."

Others will no doubt disagree with that assessment. Still, there are two ways to view such conspiracy theories. One, government efforts to artificially prop up any financial markets almost inevitably fail. Two, market participants who believe such efforts are occurring can either fight them (usually a bad bet in the short run) or try to profit from them by piggybacking.

That said, "Central bankers are not passive traders, and

where they participated probably wanted to take advantage of signals there might be stability" in the Treasury market, Crescenzi said. These signals include a narrowing of swap spreads in the past week after a huge spike and the abatement of heavy selling pressure in mortgage-backed securities since Tuesday.

In other words, maybe central bankers bought the auction because they thought it represented good value, a notion that dovetails with the view of other fixed-income participants.

"I don't think Treasuries at these levels are a bad investment," said Michael Lewitt, president of Harch Capital Management, a Boca Raton, Fla.-based hedge fund with about $500 million in (mainly) fixed-income assets. "It's generally a low-inflation world, and a 4.25% to 4.50% 10-year yield is not horrendous, especially in a nontaxable account. You'll comfortably beat inflation."

Lewitt, whose main fund was up 12% in the first half of 2003 before falling 70 basis points in July (relatively modest given the broader carnage in Treasuries), sees inflation in financial assets but not many other places. He noted that capacity utilization remains near a 20-year low, undermining hopes for a robust rebound in capital spending. "I don't think

businesses are still cutting, but they're not rushing out to spend money," he said. "If they are spending, it'll be in China and India," echoing a story here about

job trends.

Limited capital spending will keep a lid on both economic growth and the labor market, Lewitt said, despite the aforementioned improvements in jobless claims data.

"The U.S. economy is not dramatically better than six weeks ago," the hedge fund manager declared. "What changed was the psychology of the Fed downplaying deflation talk."

Again, reasonable people might disagree with that assessment. The point is that Lewitt is bullish on bonds because of a view the economy isn't going to roar and that the recent Treasury selloff created opportunity. It's quite possible he's not alone in the inclination.

Meanwhile, the heightened attention given Treasuries lately was perhaps a contrarian signal that their recent tumult was ending, at least for the time being. If so, that should provide a salve to what's recently been ailing stocks.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.