Bulls Keep Hands on the Wheel

The economic recovery that equity investors are counting on remained elusive, but that didn't stop the betting on Wednesday. Despite weaker-than-expected reports on durable goods and weekly chain-store sales, major averages rose, albeit with far less ebullience than on Tuesday.

The government reported orders for durable goods fell 2.4% in April vs. consensus expectations for a 1% drop. Additionally, March's gain -- which helped spur bullish tidings -- was revised down to 1.4% from 2% originally. Separately, chain-store sales fell 2.7% in the first three weeks of May, according to Instinet's weekly Redbook report. (Still, the S&P Retail Index rose 0.8% behind strength in industry heavyweights Costco ( COST) and Target ( TGT).)

On the notion steady-as-she-goes is preferable to a moonshot, the lackluster reports proved to be a "good thing" because they tempered traders' preopening giddiness. Instead of spiking higher, as equity futures indicated would occur prior to the 8:30 a.m. EDT economic reports, stock proxies rose gingerly in the early going. Shares retreated soon thereafter before setting intraday highs right around noon on Wall Street.

After trading as high as 8854.53 -- a hair below its Jan. 15 intraday best -- the Dow Jones Industrial Average slid steadily in the afternoon, trading as low as 8773.93 before rallying again in the final hour. The index closed up 0.1% to 8793.12. Following similar patterns, the S&P 500 closed up 0.2% to 953.22, it highest close since Aug. 22, while the Nasdaq Composite gained 0.4% to 1563.24.

At its midday apex of 959.39, the S&P established a new high since the October lows, surpassing its Dec. 2 intraday best of 954.32. The next major technical obstacle for the index is its August high just below 965.

In so-called other markets, the price of the 10-year dipped modestly, its yield rising to 3.42%; crude futures shed 2.9% to $28.51 per barrel; and gold dipped 0.7% to $365.20 per ounce. Elsewhere, the dollar continued to rebound vs. the euro, which was at $1.1758 in late New York trading vs. $1.1827 late Tuesday and the intraday peak above $1.19.

Short on Faith in the Nasdaq

In the "that's what makes markets" department, some startling different viewpoints emerged this week from two veteran technicians regarding short interest in the Nasdaq 100 Trust ( QQQ).

The current level of open interest on June QQQ puts is at record levels, Bernie Schaeffer, chairman of Schaeffer's Investment Research in Cincinnati, observed Wednesday. "So, while the Nasdaq continues to win big in the performance derby, skepticism and outright bearishness predominates," he wrote. "This combination of strong technicals and bearish sentiment has very positive implications for the strength and durability of a rally."

Schaeffer reiterated his annual forecast (originally published Jan. 3) that the Comp has the potential to reach 2000 this year, offering caveats that investors "avoid the biggest cap names and maintain a very healthy cash reserve." He also reiterated a view that "risky tech names" will vastly outperform "safe blue chips," as has been the case so far in 2003.

Conversely, Phil Erlanger, editor of Erlanger's Squeeze Play, has been persistently skeptical about the recent rally, as reported here. On Tuesday, he too observed the rising short interest in the QQQs, but came to a very different conclusion.

Noting the short ratio -- number of shares shorted divided by average daily volume -- on the QQQs is at 2.38, its highest level in 15-months, Elranger wrote "all other things being equal, this would be bullish." However, "the past four times the QQQ short ratio was this high, the Nasdaq 100 scored an immediate peak followed by new lows," he continued. (I couldn't reach Erlanger for exact dates but those four prior instances, according to his charts, occurred in December 2001, May 2001, September 2000, and March 2000.)

How is this seemingly counterintuitive development possible? "Not all short-sellers are wrong," he concluded. (Notably, Doug Kass of Seabreeze Partners initiated a short position on the QQQs Wednesday, as noted on StreetInsight.com.)

By Erlanger's estimation, if the QQQ drops below $27.30, today's short-sellers will be proven correct. On Wednesday, the QQQ rose 0.3% to $29.19.

On a separate but related note, the Nasdaq 100 was also in the sights of Charles Biderman, president of TrimTabs.com Investment Research in Santa Rosa, Calif., this week.

"Apparently, corporate America doesn't see enough of a rebound in the economy to justify a 45% jump in the Nasdaq 100," Biderman quipped. "Corporate selling remains intense."

In fact, Biderman has become "fully bearish" because of the recent intensity of insider selling and secondary offerings, along with declining levels of cash takeovers and stock buybacks, as well as stocks having entered their historically weakest season.

Beyond recent high-profile sales by executives at Microsoft ( MSFT) and AOL Time Warner ( AOL), Jonathan Moreland, director of research at IndsiderInsights, looks for companies with heavy insider selling that are trading off their 52-week highs.

Citing that criteria, the RealMoney.com contributor currently has short positions on Kohl's ( KSS), Maxim Integrated Products ( MXIM), Biogen ( BGEN) and Veritas Software ( VRTS).

"They have good short-term momentum, but current levels are not sustainable because of valuations," he said, forecasting these names will fall in conjunction with a broader market correction near term. (Biogen slid 1.2% Wednesday as the sector took a respite from its recent advance; the Amex Biotech Index shed 1.9%.)

Rear-Guard Action

Insider selling was just one of myriad bearish factors readers cited to counter Tuesday's column, which sought to examine some of the underlying reasons for market participants' growing bullishness. (Chartcraft.com reported bullishness in its Investors Intelligence survey dipped to 53.6% Wednesday from 56%, but still well in excess of bearishness, which rose to 22% from 20.9%.)

To reiterate, it would have been easier to write about why the rally will "end badly" vs. why some people see logic and ( yes) rationality in the move. But just because I wrote about it doesn't mean I've turned wildly bullish, as some readers presumed. I'm just trying not to be dogmatic.

More importantly, my aim is to inform those readers who might be inclined to bearish dogmatism about what the other (i.e. bullish) side is saying and thinking these days. It's always good to be aware of such things, but especially now because those folks are in charge -- in case you hadn't noticed.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. 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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