A few weeks back it seemed no news, no matter how good, could give stocks a lift. Today, conversely, stock proxies were able to sidestep two potentially damaging events: A much weaker than expected Philadelphia Fed manufacturing survey and Standard & Poor's placing four major Wall Street firms on credit watch with negative implications. Some weakness emerged after the 12 p.m. EDT release of the Philly Fed report, but stock proxies rallied (again) in the final 90 minutes of trading. The Dow Jones Industrial Average closed up 0.9% to 8818.14 after trading as high as 8854.21 and as low as 8687.92. The S&P 500 finished up 1.1% to 930.25, its highest close since July 9, vs. its earlier high of 933.28 and nadir of 918.15. Meanwhile, the Nasdaq Composite rose 0.8% to 1345.01 after trading as high as 1350.92 and as low as 1322.11. The Philadelphia Fed survey was clearly disappointing as the overall business conditions index dropped to minus 3.1 from plus 6.6 in July, its first negative reading this year. Expectations were for a rise to 7.2, according to Reuters. (The report was discussed here in more detail earlier today .) Given the weak Philadelphia Fed survey on July 18 was the start of a series of negative economic data, today's report was closely watched and the market's ability to withstand it was another sign that, perhaps, the worm has turned. Technically inclined market watchers were further encouraged that the Dow closed above perceived resistance at 8800, while fundamentalists cheered the better-than-expected results from retailers such as Target ( TGT). Meanwhile, traders continue to see asset allocation trades by pension funds and other institutions, as evidenced by renewed slide in the Treasury market. The price of the benchmark 10-year Treasury note fell 16/32 to 101 19/32, its yield rising to 4.18%. There's also speculation that the recent rally -- and trend of afternoon bursts -- is being fueled by tomorrow's options expiration. The idea being that people who'd made bearish bets on individual stocks or indices by selling calls have been forced to cover those bets as the market has continued to climb. That becomes a self-generating cycle: The higher the market goes, the more call sellers are forced to cover (and so on and so on) providing a lift to equity futures and, by extension, the cash market. RealMoneyPro.com contributor Doug Kass gave the following example: If someone with bearish leanings saw IBM ( IBM) breaking down below $68 in early August, they might have sold the IBM $65 calls, thinking Big Blue would go lower still. With IBM having ripped higher in recent days -- it closed up 2.1% to $76.50 today -- that call seller either would have had to buy back the call or buy the stock outright, with either having the same bullish effect. (For the record, Kass has no positions in IBM.) But Phil Ruffat, director of the Futures Division at Mizuho Securities USA, downplayed the impact of expiration. "Is this options related? A little bit, but the real issue is people are shrugging off bad news," Ruffat said. "Nobody cares about Iraq, Arafat, Enron, Martha Stewart, Eliot Spitzer or who signed the certification papers . If nobody cares, bad news is like a tree falling in the forest." The market's sudden "What, me worry?" attitude is best expressed by the recent fall in the CBOE Market Volatility Index, he said. The VIX fell 9% to 33.07 today after sliding 8.6% yesterday. Notably, the VIX rose less than a point Monday, even as equities sold off fairly dramatically. Ruffat observed that many firms, including Fuji Futures, are now selling puts they'd bought early in the year when stocks were "going through the roof." Recently, those puts bought for literally 10 cents each were worth over $80, he said, and "at some point you've got to cash in." The put-selling has, in turn, dampened equity volatility. And when volatility falls, it's "tantamount to a pilot turning off the fasten seatbelt sign -- people start walking around the cabin, feeling more secure," Ruffat said. In other words, mutual funds and others feel more comfortable putting cash to work in equities. Simultaneously, he observed that many hedge funds have far less tolerance for taking short positions these days, mainly out of fear of giving back gains they registered by making bearish bets earlier in the year. Given the "minimal" risk-tolerance of short-sellers, the "natural ebbs and flows of the mutual funds buying is actually providing support" for the market, he said. "We're not out of the woods but we're definitely better off than we were a month ago."
Bears Go Hungry
Certainly few would argue that point. Still, the bears contend what's going on now is mainly technical in nature, a temporary reprieve, rather than based on improving fundamentals. In addition to the Philly Fed data, the bears could point to today's lackluster industrial production/capacity utilization report, the 3.2% rise in crude prices (to more than $29 per barrel) the latest slide in the dollar (the Dollar Index dipped 0.19 to 106.85) and the aforementioned CreditWatch action by S&P. Specifically, the debt rating agency put the AA-minus/A-1-plus long and short-term counterparty credit ratings of Merrill Lynch ( MER), Morgan Stanley ( MWD) and J.P. Morgan ( JPM) on CreditWatch with negative implications. S&P also put Goldman Sachs' ( GS) A-1-plus short-term rating under review but affirmed its A-plus long-term rating and changed its outlook on Lehman Brothers' ( LEH) ratings to negative from stable although it affirmed its A/A-1 ratings. But as with the case with other potential negatives, the market was able to shrug off the S&P news, as the Philadelphia Stock Exchange/KBW Bank Index rose 1.1% and the Amex Broker/Dealer Index gained 2%. The action in the financials being something else for bulls to crow about today, and Dell's ( DELL) earnings after the close another potential one for tomorrow.
Tune in TaskMaster
Want still more TaskMaster? Please tune in to "The News Hour with Jim Lehrer" on PBS tonight, as a taped segment I did for them a while back is scheduled to air. The segment is about eBay ( EBAY) and why it's so loved by Wall Street. Check your local listings for the time or here for more information.