Neither Monday's intraday reversal nor news of an investigation into IBM's ( IBM) accounting proved sufficient to knock major proxies down Tuesday. Stocks failed to sustain intraday highs but ended with modest gains in what many traders suggested was further evidence of the market's bullish tone.

After trading as high as 8940.38 at midday, the Dow Jones Industrial Average stumbled in the afternoon, before rallying again in the final two hours to close up 0.3% to 8922.95. Following a similar pattern, the S&P 500 rose 0.5% to 971.56 vs. its intraday best of 973.02. The Nasdaq Composite gained 0.8% to 1603.56, a smidgen below its intraday high but its first close above 1600 since May 31, 2002.

Trading volume was 1.3 billion on the Big Board and 1.9 billion in Nasdaq trading, both down from recent days. Down volume was 53.5% of the Big Board's total, while upside volume accounted for 63% of over-the-counter activity.

While IBM fell 4.2% and restrained the Dow, the Comp was buoyed by smaller-cap tech names such as Brocade ( BRCD), which jumped 19.2% following a Merrill Lynch upgrade.

In a story that garners more media attention than market influence, Martha Stewart Living Omnimedia ( MSO) fell 16.2% on word that its founder and namesake faces indictment for insider trading violations.

Living in Different Worlds

With equities in a relatively tame state, the focus shifted again to Treasuries, where yields fell sharply after a speech by Federal Reserve Chairman Alan Greenspan.

The price of the benchmark 10-year Treasury rose 21/32 to 102 15/32, its yield falling to 3.33%. Indicating heightened expectations for a rate cut later this month, the yield on the two-year note fell to 1.20%, its lowest level since 1950 and below the fed funds target rate of 1.25%. The yield on the five-year note fell to 2.23%, its lowest level since 1954, according to Bloomberg.

Although Greenspan expressed optimism about the economy's path, he conceded that "the acceleration has not yet begun," despite indications of a "fairly marked turnaround" in financial markets, specifically equities and corporate bonds.

The Treasury market, conversely, continues to focus on the negatives, including Greenspan's comments about the labor market being "exceptionally weak" and the threat of deflation. The Fed will "lean over backwards" to prevent deflation, the chairman said, while (again) stressing that its onset is unlikely. (In a curious moment to some, Greenspan sought to distinguish between deflation and "corrosive deflation," or a price decline "that feeds on itself, creating falling asset prices, which in turn brings down levels of economic activity through the wealth effect, contracting profit margins.")

"We really don't have deflation" -- corrosive or otherwise -- according to Jim Bianco, president of Bianco Research in Chicago. But the Fed's repetitive comments on the subject make investors feel "it's OK to own bonds."

Explaining the conflicting messages from various financial markets, Bianco observed a "parallel universe" inhabited by optimists who believe monetary and fiscal stimulus will spur economic activity, and pessimists who fret about overcapacity, equity valuations, while "muttering 'deflation and Japan' interchangeably."

Bianco believes the optimists will be proven right, but he conceded the pessimists are presently running the Treasury market. Current Treasury yields are "implying soup kitchens on every corner," he quipped.

"There is a bubble in the bond market," Bianco continued, calling Treasuries "overvalued, overleveraged and bullish sentiment too extreme," as evinced by record inflows to bond funds. Current rationales to owning Treasuries, i.e., "the Fed is going to buy all the bonds," remind him of arguments three years ago that stocks were safe because Social Security funds would be invested in equities.

Rear-Guard Action

Tuesday's relatively mild equity action gives us a chance to take look back at Monday's machinations .

At 2.5 billion shares, over-the-counter volume was the heaviest of the year for the third consecutive session, The Wall Street Journal reported. Jeffrey deGraaf, senior technical analyst at Lehman Brothers, observed that the Nasdaq 100 suffered an "outside reversal" day -- a higher high and lower low than the prior session -- amid the heaviest volume since June 3, 2002. On that day, the Comp hit its highest level prior to its June-July swoon. Coincidentally, or not, that level was 1621.50, less than a point above Monday's intraday high of 1620.79.

While there wasn't much discussion over whether the Comp registered a "double top" Monday, many questioned whether the index's staunch rally has peaked, at least for the near term.

"The heavy volume makes the move Monday particularly noteworthy, and volume is now approaching the upper ends of our limits that would qualify as exhaustive," deGraaf wrote. Higher volume is healthy, but "too much can be exhaustive or panicky and indicative of reversal."

Citing those factors and the relative cheapness of volatility, the technician recommended traders buy puts which expire in the fourth quarter, writing: "We do believe more distribution will be required before downside acceleration develops."

Still, many traders remain upbeat because major averages keep surpassing key technical levels, Monday being S&P 965, Tuesday being Comp 1600. Last Friday, the Comp closed above its 20-month moving average for the first time since August 2000, Schaeffer's Investment Research reported.

Comparable levels for the Dow and S&P are 9019 and 981.79, which were approached intraday Monday -- especially by the S&P -- but not exceeded.

At the risk of repeating myself, I'll reiterate what's been stated here previously: Since the October lows, the Nasdaq has consistently been the first stock proxy to eclipse major technical obstacles, of myriad variations. If recent history repeats itself, the Dow and S&P will soon surpass their 20-month moving averages and then challenge their highs of a year ago, as the Comp is currently doing.

Unless, of course, Monday marked the peak of the advance. Little that occurred Tuesday suggests it did, and a note of caution for those eagerly awaiting the next big drop comes from Fari Hamzei, president of Hamzei Analytics, a Los Angeles-based quantitative shop.

Hamzei has been shorting S&P and Nasdaq e-mini futures for the past week or so, at ever-higher levels. (Other than on Friday, he claimed many of his intraday short positions were profitable, particularly on Monday.)

The quant trader was still short Tuesday afternoon but observed the put/call ratio on Nasdaq 100 options was at its highest level in over 18 months, indicating the potential for an "explosion to the upside" in the coming days.

Hamzei is a very short-term oriented trader, and thus his techniques are not applicable to many readers. But I wanted to share that little tidbit nevertheless.
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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