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Stocks showing gains

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Stocks are moving higher this morning and I like what I see near- term. The reason I like what I see is that some stocks I felt needed to go higher are showing some strength, and stocks I thought might go lower are showing some weakness. The bond market is a big part of this.

10-year YIELD Chart - last nine months

Since the surprise 10-year auction of $6 billion worth of notes carrying a YIELD of 4.5% the 10-year YIELD ($TNX.X) had an inside day of trading (on YIELD) and then broke higher yesterday. Today we're getting some follow through to the upside (selling in this bond) and some cash is being freed up. There will undoubtedly be some key resistance for YIELD at the March 22 low YIELD level of 4.689%. A break above that level could add some further bullishness for stocks. We must understand that the surprise auction of 10-year noted was to help alleviate pent up demand for this bond and the perceived safety. However, I view the selling in this bond a near-term positive as it indicates that there might be a sign that some calm is coming into the U.S. markets since the terrorist attacks.

Fannie Mae Chart - last nine months

While I've generally been on the side of "higher YIELD good for stocks" I wanted to try and pick out a couple of stocks that a higher YIELD might hurt. This helps me test some scenarios and make sure I'm on the right side of things. I view today's drop in Fannie Mae (NYSE:FNM) as a positive for the broader market. Should the MARKET be willing to sell this stock, then I make the observation that the MARKET may be under the impression that mortgage rates are perhaps on the rise longer-term. Interest rates usually rise during economic expansion or strength. However, we know that stocks usually move well in advance of such Fed policy and so do bonds.

Speculation

Signs of bullish speculation are a good thing under current market conditions. It shows aggressiveness by market participants and that can build for a bias in the direction of speculation. Yesterday, shares of Cepheid (NASDAQ:CPHD) surged and they're getting some follow through today to the upside. A company few had heard about until yesterday is finding buyers and willing to speculate on the company's fortunes due to potential Anthrax exposures in Florida.

Cepheid Chart - last nine months

A stock that most have never heard of surged yesterday on more than 31 million shares. There were undoubtedly some shorts that came into the stock thinking things had gotten overdone to the upside. This perhaps gave aggressive bulls a chance to get a short-squeeze going on this morning's gap higher. Bulls that played the stock long from yesterday's "market monitor" can now move their stops up to just under the $9.30 level and still targeting 50% retracement near $11.70.

Jeff Bailey
Senior Market Technician
Option Investor

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