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It was hard to draw conclusions from Tuesday's sluggish, low-volume session, but the evidence tilted toward the bulls, thanks to a surge in the final 90 minutes of trading.

Skeptics noted the disappointing University of Michigan consumer sentiment index, drop in building permits, still-slow volume and very modest gains by blue-chip proxies.

Optimists countered with the surge in housing starts to a 17-year high and strength in the

Nasdaq Composite

, which got a boost from market-cap heavyweight


(MSFT) - Get Microsoft Corporation Report

, as well as semiconductor stocks such as



and retailers such as




The Comp rose 1.2% to 1760.99 after trading as low as 1737.40; the index exceeded its July 14 closing high of 1755 but not that day's intraday best of 1776.10, which is the next technical obstacle for the index. The semiconductor index (SOX) rose 2.5% to another 52-week high of 425.06.

Bulls were further enlivened by the

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S&P 500's

ability to close above the closely watched 1000 level, albeit after a daylong struggle. After trading as low as 995.30, the S&P closed up 0.3% to 1002.33.

While the

Dow Jones Industrial Average

couldn't expand much upon Tuesday's

technical breakout, it didn't retreat either. The Dow closed up 0.2% to 9428.90 after trading in a tight intraday range between 9445.08 and 9377.72.

The market's recent performance "speaks of resilience

and of underweighted mutual fund and hedge fund managers desperately trying to keep up with the market averages," said Brad Ruderman, managing partner at Los Angeles-based Ruderman Capital Partners. "It also speaks of the bond market not being 'topic A' in the headlines

and lastly, it speaks of an unambiguous pick-up in the economy,

sans job growth."

Noting the ability of vacationing money managers to communicate via phone and Internet connections, Ruderman dismissed criticism that the recent advance is less significant because of the absence of big volume.

"I think volume has great relevance, but on individual stocks," he said. "If one waited for record volume during the last six months, they'd have missed everything. I'm no technician, but when the cumulative

advance/decline line is as strong as it is, I'm not going to split hairs on the overall trend."

Advancers bested declining stocks 21 to 11 in


trading, where nearly 1.3 billion shares traded. Gainers led 20 to 11 in over-the-counter trading, where 1.8 billion shares changed hands, the highest level in more than a week.

Cold Calculus and Treasuries

In the cold, calculating logic of Wall Street, those with a zeal to be long stocks also might note the major averages were barely affected by the news of a bombing of the United Nations building in Baghdad. The attack was cited as a contributor to the rally in "safe-haven" Treasuries. The price of the benchmark 10-year note rose 24/32 to 99 3/32, its yield falling to 4.36%.

Treasuries also got a boost from Steven Galbraith, chief U.S. market strategist at Morgan Stanley, who

raised his recommended fixed-income allocation to 25% from 20%, lowering cash to 10% from 15%. Galbraith's equity recommendation remained at 65%.

Galbraith views the environment for equities as "constructive," citing low inflation, improving economic data, tax relief and a less-risky environment for corporate earnings. However, "more than one investor has figured this out," he quipped. "Just about every quantitative measure we use to look atthe pricing of equities suggests things are roughly appropriately valued."

Prior to Tuesday, the strategist's most recent allocation change was on

June 17, when he lowered both stocks and equities by 5%. That was a particularly well-timed call given the subsequent selloff in Treasuries.

With the benefit of hindsight, "we should have suspected we were onto something," Galbraith wrote, recalling the "take-some-money-off-the-table" call in June was met with "far greater skepticism" from fixed-income participants vs. their equity counterparts.

Given the overriding bullishness among fixed-income participants earlier this summer and the "mean reverting" tendency of financial markets, "the stunning increase in long-term Treasury yields is not that surprising," he commented. "Neither would an overshoot be. In our view, it was really the starting base of yields that was the anomaly anyway, not the recent move up."

A lessening of greed and rising fear among Treasury participants is one reason Galbraith raised his bond allocation recommendation. "Although we still prefer stocks to bonds, expected returns in asset classes are converging again -- and rapidly," he commented.

Citing the "tens of billions" of pension fund monies "poised to jump back into the investing pool," the strategist suggested the "asset allocation tug of war" between stocks and bonds "can once again begin in earnest."

Now that Treasury yields have reverted to more normal levels, that is.

Alternative Appeal

Reading between the lines, Galbraith seemed fairly neutral on equities at current levels (he said that outright) and not terribly enthusiastic about bonds, either. And, yet, he's still recommending 65% allocation in equities, 25% in bonds and a mere 10% in cash.

Galbraith did not return calls seeking comment but his job as strategist is to cater to institutional clients. These firms mainly have "long only" biases and "most are headed by equity types who have a disdain for bonds," said a strategist at another firm, who spoke on the condition of anonymity. "That is the target audience for a typical strategist."

These clients also have, either by training or charter, a stark preference for financial assets over "real" ones, which is one reason why only three of the so-called major firms -- CIBC World Markets, Goldman Sachs and Raymond James -- recommend any allocation to "alternative investments," including commodities and real estate.

The point of all this is to say what's good for the institutional goose is not necessarily appropriate for the retail gander. Thanks to the three-year bear market and the concurrent housing boom, most Americans have far more of their wealth in real estate these days vs. equities, especially compared with the late 1990s.

Also, while it remains largely ignored by mainstream financial houses, more investors have turned to gold as a hedge against U.S. financial assets. Gold overcame early weakness Tuesday to close up nearly 1% at $363.40 while gold stocks moved in similar fashion; the Philadelphia Stock Exchange Gold & Silver Index rose 3.5% to 89.42 after having traded as low as 86.

Notably, gold's reversal coincided with a midday downturn for the dollar, which ended mixed vs. the euro and yen. The Dollar Index dipped 0.1% to 97.32 vs. its intraday high above 98.

I remain long the

(TGLDX) - Get Tocqueville Gold Investor Report

Tocqueville Gold fund and continue to believe nearly all investors should have some exposure to gold and related stocks, even if just as an "insurance policy." The recent signs of strength in equities and accompanying bullish sentiment make me feel more so inclined, not less.

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.