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No news was good news Wednesday, reflecting the market's newfound sense of optimism.

The major stock market indices advanced to fourth-month highs as investors embraced

Tuesday's bullish tone. That said, this rally on the back of a


pause and lower oil prices is hard to trust given the tug of war in the markets.

Investors are stuck between reasons to support stocks and reasons to spurn them. On the supportive side, prospects for a so-called soft landing, low oil prices, double-digit profit growth, and many bearish investors throwing in the proverbial towel are helping send stocks higher. Notably, economically sensitive sectors like the transports and technology have led the market in recent days.

On Wednesday the

Nasdaq Composite

outperformed again, rising 0.5% to 2227behind strength in tech favorites such as




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Dow Jones Industrial Average

gained 0.4% to 11,543.32, while the

S&P 500

added 0.4% to close at 1318.07. The S&P was buoyed by retailers such as


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and energy stocks such as


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, which rebounded from recent weakness as oil broke its seven-session losing streak.

The Treasury bond market rallied Wednesday, as its more bearish investors continue to forecast a weak economy and rate cuts before any rate hikes. The 10-year Treasury note gained 2/32 to yield 4.76%.

Is Eight Enough?

For all the renewed enthusiasm and talk of retesting the May highs, the stock market still has not experienced a major correction. And one day of conviction (Tuesday) does not mean that new highs, if reached, are sustainable. Many of the summer's rallies ended with traders selling into the highs. With key inflation data on the horizon Friday, it is difficult to imagine investors going unconditionally long into the end of the week.

"Investors are acting like lovelorn teenagers pulling out petals from a flower," says Sam Stovall, chief investment strategist at Standard & Poor's. "There is inflation. There's no inflation."

The S&P 500 has been stuck in a trading range between 1225 and 1325 for more than nine months, says Stovall. He adds that index has had two 8% corrections, much weaker than the average 13% correction.

Is 8% enough? Maybe so.

"When the transports and the brokers are leading stocks higher, the market doesn't come down," says Alexander Grace, a trader and consultant to several hedge funds. The Dow Transports gained 1.75% Wednesday, adding to its 3.33% gain on Tuesday. The Amex Securities Broker-Dealer Index gained 2.4%, adding to its 3.2% climb from Wednesday.

Grace says he's confidently bullish because breadth in the market has been improving, volume rising and the yield curve suggesting rates are going lower. Plus, commodities are down, which means inflation isn't a problem, he says.

Grace has been buying


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, the homebuilders, automakers like


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General Motors

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, and tire makers

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Grace called the June 13 low a "textbook low," as reported

here; three months later, he's still right.

Philip Roth, chief technical analyst at Miller Tabak, says the market has been recovering since June and that same recovery is still under way. But the market will get hit in the fourth quarter, he says. Roth looks for two lows in the stock market every year, and they typically come between March and May, and again between September and November. Given that this year's spring low arrived late, in June, he expects the fall low could easily come later than normal as well.

"One economic statistic can change how people react," says Roth. A weaker economic statistic and a stronger inflation statistic could do it, he adds. "People will look at the negative aspects of the slowdown. It is going to happen."

Hedge funds and short-term traders are the main players in the market lately. Their bets may not jive with those of the long-term fund managers and investors. The hedge fund bargain-hunting in the old market leadership like transports and homebuilders, for example, does not necessarily mean that the old leadership is genuinely coming back, says Subodh Kumar, chief investment strategist at CIBC World Markets. Kumar adds that the longer-term investors have been slowly shifting into large-cap names like health care and consumer staples, which is more consistent with an economic slowdown.

Roth agrees, adding that the "public is not participating" in the market. He argues that once the market has a larger correction this fall, the decline will be strong enough to pull the public back into the market as they'll suddenly believe stocks look inexpensive.

"We need something to attract

longer-term investors," says Roth. "We've got to have preparation for a sustained move next."

September is not likely the month the public comes back. The press has solidly noted that the market is typically weak in September, which probably means that September won't be weak. The notion that September would be bad was so well-trumpeted that there was no way it was going to be bad, notes Gail Dudack, chief investment strategist and partner at Dudack Research Group.

But September isn't categorically weak, says Roth. Looking more closely, he notes the first half of September is typically strong, while the second half is weak. If the market rallies in the second half of September, the decline may be delayed, says Roth, but such a divergence from the trend "doesn't generate a lot of upside potential."

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click


to send her an email.