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The truism that thin markets lead to volatile trading got ample support today. After dropping sharply early on, stocks reversed sharply at midday and managed to sustain the bulk of their intraday gains despite retreating a bit in the final hour.


Dow Jones Industrial Average

closed up 1.1% to 8519.38 after having traded as low as 8315.67 early on and as high as 8558.01 at around 3 p.m. EDT. Similarly, the

S&P 500

gained 1% to 902.96 vs. its early low of 882.88 and session high of 907.39. The

Nasdaq Composite

ended up 0.7% to 1304.60 after having traded as low as 1270.73 and as high as 1310.33.

Just over 1.1 billion shares were exchanged on the Big Board, where gainers led decliners 18 to 13, and just under 1.1 billion traded in over-the-counter activity, where decliners held a very slight edge.

"What we're seeing today is low volume and a lot of short-covering," said Diane Garnick, global equity strategist at State Street Global Advisors in Boston. "I think investors continue to be nervous."

That nervousness was evident early on after

AOL Time Warner


lowered guidance for its America Online Internet unit, Merrill Lynch downgraded

J.P. Morgan Chase

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, and


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announced that Charles Prince has been named head of global corporate and investment banking at its Salomon Smith Barney unit, replacing Michael Carpenter.

Reflecting the broader market's general trend, each of those three firms closed well off their early highs. AOL and Citigroup ended with gains of 1.5% and 2.6%, respectively. J.P. Morgan finished off 1.3% to $23.59 but well above its nadir of $22.08.

Other names aiding major averages included


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Philip Morris

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Garnick said the short-covering and the market's resulting reversal were triggered by the S&P 500's move above 890, a level at which there's considerable open interest in both puts and calls. Equity index futures and options expire next Friday, Sept. 20 -- a so-called triple-witching session -- and Garnick observed there's a "huge concentration" of open interest at strike prices of 890 and 900, with about 14,000 and 50,000 contracts respectively. By comparison, there are only about 1,200 contracts at 905, the next strike price, she said. Therefore, "there should be a lot of trading within that

890 to 900 range," which is precisely what occurred today.

Bob Basel, director of listed trading at Salomon Smith Barney, largely agreed that today's move was mainly the result of short-covering.

"There was no economist catalyst, no number out where everyone said 'Let's cover because the economy is getting better,'" he said. "It was more of a technical thing."

On the economic front, the government reported wholesale inventories rose 0.6% in July vs. expectations for a 0.2% increase. Sales also rose by 0.6%, besting expectations for a 0.4% rise. That's the second month in a row in which both inventories and sales rose, according to Gina Martin, an economist at Wachovia Securities.

"Wholesalers seem to be gaining confidence after sales increases in recent months and are finally adding to inventories," Martin wrote.

This bullish interpretation -- that rising inventories are a sign businesses are more confident of future demand -- was repeated by various news outlets. That the inventory-to-sales ratio is at an all-time low of 1.23, according to Martin, is another healthy sign, indicating that businesses remain lean and sales sufficiently strong.

But State Street's Garnick offered a different interpretation.

The much higher-than-expected inventory data mean "consumers are not out spending as much as purchasing managers expected," she said, noting that today's report was for July and that last week's retail sales data provided more up-to-date information that the back-to-school shopping season is sluggish. Today's report "is giving us evidence there's lot of inventory on hand, decreasing chances companies will need to buy anything for some time," Garnick said. "That's why the market was down so quickly at the open."

That's also why Garnick remains defensive about the market's intermediate-term prospects, rallies today and Friday notwithstanding.

War and Remembrance

The aforementioned short-covering and analysis of the inventory report had far more influence on trading today than concerns about the

first anniversary of 9/11, Garnick said. "Nobody is talking about that except guys in the press. From an investment perspective it's a non-event."

Again, Salomon Smith Barney's Basel agreed. From his point of view, 9/11 discussions, when they occur, are about "lives, emotions and psyche -- the rehashing of memories. Nothing to do with the stock market's reaction."

Obviously 9/11 is an emotionally charged and highly sensitive issue. But the press does risk overemphasizing its importance in terms of the financial markets. Still, with the commemorations already underway and extensive television coverage expected, reminiscences of those events could spark fear of future attacks, which could have a negative effect on trading. Such legitimate concerns were exacerbated by news reports of an al-Jazeera interview with top al Qaeda (and most wanted) operatives Khalid Shaikh Mohammed and Ramzi Binalshibh that is scheduled to air on the Arab television network Thursday.

In addition, President Bush is widely expected to press the case for action against Iraq in a speech before the United Nations on Thursday. Such expectations helped push gold prices to a six-week high and crude prices back toward $30 per barrel, as

reported earlier.

As posted in's

Columnist Conversation, I'll stick by an

earlier suggestionthat the market may continue rallying up to and just after the anniversary of 9/11. Rallying now would be a show of defiance by Wall Street that the terrorists haven't won or broken their sprits.

It would also really confuse the majority, especially those spooked by Bill Gross' "Dow 5000" call on Friday, and it could get folks comfortable again before the next decline begins.

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.