Market Returns to Bullish Ways

Afternoon trading mirrored the up-and-down character of the morning, as major averages ended today with relatively solid gains after a pretty wild session -- particularly for a mid-August Wednesday.

The Dow Jones Industrial Average rose 1% to 8957.23, but that was after the index traded as high as 8974.36 and as low as 8798.89. Similarly, the S&P 500 closed up 1.3% to 949.36, after having traded as high as 951.98 and as low as 931.80. The Nasdaq Composite rose 2.4% to 1409.25, just below its intraday high and vs. its earlier low of 1378.09.

Among technicians, there was a lot of talk today about the Dow's inability to rise above 9000, contrasted with the Comp's ability to surmount 1400, as well as the Russell 2000's close above 400; the small-cap index rose 2.3% to 406.78. Combined with major averages' rise above their 50-day moving averages on Monday, today's action in broader market proxies was uplifting to those in the bullish camp.

"I've never been a big believer of benchmarks at Nasdaq 1400 or Dow 9000, but the market is putting in a good job any way you cut it," said Gary Kaltbaum, senior markets technician at Investors Edge Partners. "The market is finishing on a high note and drops on lighter volume. The new high list is starting to pick up and the worst stocks are coming off their lows."

At 1.3 billion shares on the Big Board and 1.4 billion in over-the-counter trading, today's volume was in line with that of the prior two trading days. However, advancers bested declining issues by better than 2 to 1 on both exchanges and new 52-week highs led new lows 35 to 23 in New York Stock Exchange trading. New 52-week lows led 65 to 47 in over-the-counter activity, but the gap is narrowing.

Those encouraging statistics notwithstanding, Kaltbaum expressed concern the recent rally "looks, feels, tastes and acts" like rallies that followed the lows on Sept. 21 and in March 2001. Rallies that ultimately failed, that is.

Separately, Phillip Erlanger of Erlanger's Squeeze Play, issued a more cautious outlook. "I think the market is in trouble and don't see reasons to bet on the long side," he said. "If the market starts to sell off, I'd sell out of it."

Erlanger's skepticism is based largely on the head-and-shoulders pattern for the S&P 500. A "head and shoulders" is a bearish chart pattern characterized by three peaks, with the middle one being highest. The troughs of the two peaks that flank the midpoint define the neckline.

"Basically, the S&P is back to the neckline of its four-year topping pattern," he said, something a host of technicians have observed.

Today, Dan Fitzpatrick observed in the's Columnist Conversation that, at around 950, the S&P has returned to the neckline of a head-and-shoulders pattern evident on a weekly chart of the index going back to 1995.

"One of the highest probability short trades I know of is after a failed rally back up to the neckline of a completed head and shoulders," he wrote. "A 2% to 3% overshoot of the neckline isn't too much to expect but the current H&S pattern is still intact, and this test is the last step in its completion."

Erlanger, meanwhile, added: "You can get mystical about technical patterns, but basically everybody that bought stocks in the last four years above current levels represents a massive amount of overhead supply."

The market's rally off the July lows on declining volume "suggests we're going to need some really significant volume accumulation to cut through the overhead supply," he continued. "It's not impossible but it's asking a lot given what's going on" on the fundamental front.

The "only good thing" that can be said about the market's seasonal weakness in September/October is "a lot of people are talking about it," Erlanger quipped. The same could be said about the S&P's head-and-shoulders pattern.

Fundamental Follies

Among the issues aiding stocks today were crude futures trading back below $30 per barrel, and the guilty plea by former Enron executive Michael J. Kopper, leading to the government seeking to freeze the assets of former CFO Andrew Fastow.

Additionally, Wall Street cheered the Byzantine deal between AOL Time Warner ( AOL), which rose 7.3% and AT&T ( T), which gained 8.9%.

Names giving the Dow a boost included Home Depot ( HD) and Microsoft ( MSFT).

Gains by those big-caps helped overcome a profit warning by Radio Shack ( RSH), which fell 16.4%, and Salomon Smith Barney's downgrade of fellow brokerages Merrill Lynch ( MER), Lehman Brothers ( LEH), Morgan Stanley ( MWD), Bear Stearns ( BSC) and Goldman Sachs ( GS). Actually, the Amex Broker/Dealer Index closed up 0.5% to 422.78, after trading as low as 408.41 earlier.

Also weighing on shares earlier were reports the international terminal of the Miami airport was evacuated, and comments from various Fed governors, indicating rate cuts may not be imminent.

"The Fed's current monetary policy stance is appropriately supportive of the recovery process," Philadelphia Fed President Anthony Santomero said in a speech today.

Chicago Fed President Michael Moskow and San Francisco Fed President Robert Parry issued similarly themed comments in separate appearances.

Perfect Storm Gathers Strength

In recent days I've written about the possibility that bond prices peaked last week. Today, the price of the benchmark 10-year Treasury note fell 13/32 to 101 14/32, its yield rising to 4.20%.

Many people deduce that what's bad for bonds is automatically good for stocks, and equities have benefited lately from asset allocation movements out of fixed income. So it seemed again Wednesday.

But hard-core bears foresee a scenario in which stocks and Treasuries fall in tandem, triggered by another steep drop in the dollar, which was off modestly today. Such a scenario is predicated upon foreigners selling dollar-denominated assets in large quantities.

So, understandably, the bears were enthused this morning by reports in the British press that Saudi Arabian investors are withdrawing billions from the U.S. Bears believe this is just the tip of a massive repatriation iceberg.

Such developments merit watching, but reports of $100 billion to $200 billion of Saudi repatriation are not consistent with official tabulations of their holdings, as reported earlier.

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.

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