Midday Muse: Up but Not Out

A plethora of positive news sends major averages higher but gains are muted and breadth negative.
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Buoyed by a number of positive catalysts -- strong earnings from

Apple

(AAPL) - Get Report

and

AMD

(AMD) - Get Report

, strong retail sales and tame inflation data -- bulls charged past four-year highs on the

S&P 500

Thursday morning and other major averages jumped in concert.

By lunchtime on Wall Street, the rally had lost some steam and the bulls' charge slowed to a trot, albeit still in a decidedly forward direction.

In midday trading, the Dow was recently up 0.7% to 10,629 off an intraday high of 10,657. The S&P 500 index was up 0.3% to 1227, above its four-year high of 1225 but down from its early best of 1233. The

Nasdaq Composite

gained 0.4% to 2152 vs. its early high of 2164.

Volume was solid with over 1 billion shares traded in both Big Board and over-the-counter trading as of 1 p.m. EDT, but breadth had turned negative on both -- a negative technical divergence given the positive fundamental data.

Given the confluence of positive catalysts, one could easily be disappointed by the apparent lack of aggressive buying.

Bulls' hoofs, it seemed, got stuck in oil, with energy shares declining in line with crude prices. In recent Nymex trading, crude oil for August delivery was down $1.91 to $58.10. Investors also sold safer dividend-yielding stocks to join in the party in the tech arena.

All in all, there's no worries to be had for now, positive momentum remains strong and stocks may even get another bounce in afternoon trade, says Cantor Fitzgerald market strategist Marc Pado.

The loss of steam Thursday morning comes as many traders had placed short positions right above the four-year high at 1225 on the S&P 500 index, Prado says.

"But there's no reason to be selling this market at this point. We can probably come back in the afternoon," he says. Friday brings

GE's

(GE) - Get Report

earnings, which are often used as a broad market benchmark, and consumer confidence data for June, which can both serve as catalysts for more gains.

When the S&P 500 first tested four-year highs in early March, the market had come off a long uptrend from the previous year and was really running out of reasons to push higher. It started heading south two days later, having received no "confirmation from the Nasdaq," Pado says. And March through May is usually a period to make new lows, so these new highs weren't in keeping with normal seasonal patterns, "creating some anxiety," he says.

This time it's different. As the market enters the second-quarter earnings season, expectations for S&P 500 earnings at 7.5% are fairly low, and "so far, we're not really seeing anything in the way of disappointments," Prado exclaims.

If Apple and AMD's earnings Wednesday are any indications of things to come, tech stocks on the Dow, such as

HP

(HPQ) - Get Report

,

IBM

(IBM) - Get Report

,

Intel

(INTC) - Get Report

and

Microsoft

(MSFT) - Get Report

now also have the potential to move convincingly higher, powering the Nasdaq and the broad market, the strategist says.

Strong Data and Oil

Strong retail sales and tame non-existent price inflation have positive implications for the market, of course. Futhermore, most of the big questions such as the Fed continuing to lift rates, oil prices at $60 per barrel, and trade tensions with China "are on the backburner during earnings season," Pado says.

These issues may come back to haunt the market in late July and August, he predicts. Thursday's economic data, as with other June data, are very positive but are not taking into account the renewed surge in oil and gasoline prices.

June retail sales rose 1.7%, almost twice the rate economists had predicted. Excluding auto sales rose 0.7%, also beating the consensus estimate of 0.5%. "We need now to see how surging gas prices affect July and August," says Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The June CPI was unchanged, and the core CPI, which excludes energy and food prices, rose 0.1%. Both numbers were expected to rise 0.2%. Headline inflation was depressed by a drop in gasoline prices and unchanged food prices. "The former will rebound in July," Shepherdson says.

And even if core inflation remains very tame -- it was unchanged in April and rose 0.1% both in May and in June -- "current inflation is not the Fed's main concern," the economist says. "The issue is what 4% unit labor costs will do for core inflation next year."

The bond market, it seems, has caught up to the Fed's plans after a flurry of Fed speakers hammered home that message since last week. The benchmark 10-year Treasury bond was recently down 4/32 in price while its yield advanced to 4.18%.

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

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