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Real Story: Rally On

M&A activity led by Alcoa means less supply of stocks. John Roque says he's still bullish on basic materials stocks.

The "shrinkage" in the supply of stocks because of M&A activity is a key factor to the recent rally generally, and Monday's advance specifically, Aaron Task says on

The Real Story podcast.

The market cap of the U.S. stock market through the first four months of 2007 is set to shrink 4.3% by the end of the year based on stock-buybacks and new cash takeovers vs. fund flows and new stock offerings, Task says, citing the data of Trim Tabs. That pace of "shrinkage" so far this year is more than double that of 2006.

M&A activity was clearly the highlight of an otherwise sleepy session Monday, with


(AA) - Get Alcoa Corp. Report

offering some $27 billion for Alcan

(AL) - Get Air Lease Corporation Class A Report

, which jumped nearly 35%. Alcoa's more-than-8% rally helped the

Dow Jones Industrial Average

secure its fifth-straight record close and 24th gain in the past 27 trading days, the longest such streak since 1927.

Other stocks rallying on deal news included

Ohio Casualty


, which agreed to sell itself to Liberty Mutual, and

Armor Holdings


, which is reportedly in talks to be acquired by

BAE Systems



(WEN) - Get Wendy's Company Report

was also a big winner amid continued speculation it may be a takeover target, while



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shed 1.9% as "people came to their senses" about the potential for a deal with


(MSFT) - Get Microsoft Corporation (MSFT) Report

, Task says.

John Roque, chief technical analyst at Natexis Bleichroeder, was Task's guest Monday, and he agreed that

bullish sentiment remains in check amid the Dow's record-setting advance.

"Bullishness might be wide but it's an inch deep. Nobody is running around with their hands in the air yelling 'yippee,' " Roque says. "I'm amazed the market can continue to be this uniform and businesslike and not frothy; it goes up in steady fashion. There doesn't seem to be any blowoff action."

Roque himself remains more cautious about the broader market vs. specific stocks and groups, and is particularly bullish on energy and basic materials stocks. His favorite stock in the latter is Peruvian copper miner

Compania De Minas Buenaventuras

(BVN) - Get Compania de Minas Buenaventura SAA Sponsored ADR Report

, which rose 1.8% Monday.

Task notes

Freeport McMoran Copper & Gold

(FCX) - Get Freeport-McMoRan, Inc. (FCX) Report

was another winner Monday, while citing

Marvell Technology

(MRVL) - Get Marvell Technology Group Ltd. Report


Hansen Natural


as best embodying the market's bullish tone.

Both stocks rallied Monday despite "bad news"; the resignation of the CFO after an internal review of options-grants in Marvell's case; and weaker-than-expected earnings in Hansen's case.

"It's not the news that matters, it's how the stock -- or the market -- reacts to the news that matters," Task says.


here to listen to the entire podcast.