Rally Built on Technical Victories

As key resistance points fall, bulls become more confident and bears take cover.
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One of the great ironies on Wall Street is that the higher stock prices climb, the more people want to buy them. This quirk of human nature (traders are people, after all) was boldly displayed Thursday, as gains begat more gains.

Building on Wednesday's sharp rally and strong results from

Hewlett-Packard

(HPQ) - Get Report

after the bell, stock proxies bolted higher early Thursday. Some positive economic data furthered the advance, which helped major stock proxies eclipse some key technical resistance points. That, in turn, spurred further gains that held up through the close.

At day's end, the

Dow Jones Industrial Average

was up 2.6% to 8845.15, its highest close since Aug. 26, after trading as high as 8856.57. The

S&P 500

gained 2.2% to 933.76, compared with its intraday best of 935.15, and the

Nasdaq Composite

rallied 3.4% to 1467.56 after trading as high as 1468.72.

In terms of technical accomplishments, the S&P 500 eclipsed its Nov. 6 closing high of about 923 and the Comp bested its Nov. 18 intraday high of 1425, establishing its highest close since June 19. Adding to the significance of the upside breakout, more than 2 billion shares were exchanged in

Big Board

trading, compared with the 10-day moving average of about 1.3 billion. Gainers bested declining issues by 11 to 5.

Advancers led by a similar spread in Nasdaq trading, where a solid 2.1 billion shares changed hands.

Elsewhere,

Microsoft

(MSFT) - Get Report

traded as high as $58 before closing up 1.9% to $57.84, surpassing resistance at about $57.50. I've

written previously about the significance of a possible Microsoft breakout, and the market-cap giant's success this time around could portend further gains for the major indices.

In the "close, but no cigar" department, the Philadelphia Stock Exchange Semiconductor Index traded as high as 366.36, but couldn't surmount its Aug. 22 intraday high of 367.90; the SOX closed up 7% to 361.90. Similarly, the Philadelphia Stock Exchange/KBW Bank Index traded as high as 797.12, failing to breach 800 for the first time since August, before closing up 2.7% to 794.76.

Bulls on Parade

Throughout the market's over-six-week rally, the ongoing debate has been over its sustainability. Thursday's session convinced those already bullish that more gains are forthcoming.

"The

downward spiral has ended," said Phillip Ruffat, director of the futures division at Mizuho Securities USA, who turned bullish

long before the market's October bottom. "I think the key thing here is the

surpassing of technical levels, but I also saw excitement over H-P and talk about

General Electric

(GE) - Get Report

increasing its dividend."

Hewlett-Packard rose 12.7% after posting better-than-expected results Wednesday evening, while GE jumped 8.3% despite cutting its 2002 earnings forecast and announcing a $1.4 billion charge related to its Employers Reinsurance unit. GE did increase its dividend, and the bullish argument is that its lowered guidance was already factored into the stock.

Ruffat also observed that corporate bond issuance has picked up noticeably, a function of shrinking spreads between corporate and Treasury yields. That in itself is healthy and, furthermore, "if they can borrow, they can put money to work

for long-term capital investment," he said.

Brett Gallagher, head of U.S. equities at Julius Baer Investment Management, has been far less ebullient than Ruffat in recent months, and he remains skeptical about the market's long-term prospects. He has taken note of a different set of technical indicators -- such as overbought/oversold indicators, put/calls ratios and the CBOE Market Volatility Index -- suggesting that they are "now moving to levels where they're looking more negative." (The VIX fell 4.5% to 27.30.)

However, he too observed some important and improving fundamental developments, including a sharp steepening of Treasury yield curve (or the spread between the yield on T-bills and the 10-year Treasury, which fell 28/32 to 98 24/32 Thursday, its yield rising to 4.15%.) Additionally, he noted that the three-month moving average for MZM -- the broadest measure of U.S. money supply -- is now growing at 4.7% vs. its trough of 2.9% in early July.

Also, in contrast to

Wednesday's session, there was some fundamentally positive news. Most notably, the index of leading economic indicators was unchanged in October after four straight months of decline, compared with expectations for a 0.1% drop. Elsewhere, the Philadelphia Fed's index of business conditions rose 6.1 in November, reversing a 13.1 decline in October and besting expectations for a flat reading. Additionally, weekly jobless claims were lower than forecast for a second straight week.

"

Valuation remains a huge 'sell' in capital letters, but you've got these other factors which will probably determine the course of the market in the short to intermediate term," Gallagher said, noting that seasonality and fund manager's chasing performance should further support the market, near term. "We have an opinion and the market has an opinion, and that's the only one that counts. We've got to play along while these factors are present and the market doesn't care about valuation."

Julius Baer has been "playing along," largely via a bet on the

S&P Depositary Receipts

(SPY) - Get Report

and

Technology SPDR

(XLK) - Get Report

.

"The only way to outperform is with a portfolio full of

Corning

(GLW) - Get Report

and

Nortel

(NT)

and those kind of issues, and that's not something we're comfortable doing," he said.

Indeed, both those names were up big Wednesday, and a host of previously downtrodden names were among the session's most active gainers, including

Ford

(F) - Get Report

, which jumped 15.6% thanks to some positive comments from Deutsche Bank and optimism about November car sales.

Furthermore, a host of one-time highfliers in technology, which have more recently fallen on hard times, bounced sharply, including

PMC Sierra

(PMCS)

,

Broadcom

(BRCM)

,

Brocade

(BRCD)

,

Vitesse Semiconductor

(VTSS)

and

BEA Systems

(BEAS)

, as well as a slew of Internet-related names, such as

Akamai Technologies

(AKAM) - Get Report

.

"Stocks that have moved are junkier names, led by tech and telecom,

and now finance has joined along," Gallagher said. "I think because this is year-end, you do have a lot of performance-chasing going on, and there's still evidence of short-covering."

By his own admission, Gallagher is a candidate for so-called performance anxiety. Baer's roughly $500 million U.S. equity portfolio was down 23.8% at the end of October, trailing the S&P by about 200 basis points. (The firm's $1 billion international equity fund was faring much better, far exceeding its benchmark, the Morgan Stanley EAFE Index.)