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Industrials jump 135 points after mixed data

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The broader-market stock indexes are at their session highs as the Dow Industrials jumps 135 points (+1.23%) to 10,250 amid mixed economic data.

The morning started out with a much stronger than expected durable goods orders that showed a pickup in buying for big- ticket items. That bullishness was later offset somewhat by a housing number that showed a much weaker than expected decline in new home sales of -14.8% to 823,000. Economists had expected a new home sales number of 939,000.

Despite the mixed economic data, the early response from the MARKET has been bullish. Also helping the bulls out has been Mr. Greenspan's testimony. While his testimony has been even sided with words of encouragement on the economic front, he has given equal time toward the "it's too soon to tell" argument that bears continue to believe in.

The one thing that I've noted from his testimony is the continued mentioning of the nation's productivity gains. Mr. Greenspan likes to monitor the productivity numbers, which have been strong, to help guide his thoughts on potential inflation.

In past commentary, I felt that equity bulls most likely wanted to see some strong productivity gains as this may help keep the Fed on hold from raising interest rates. The MARKET seems to be responding favorably to Mr. Greenspan's testimony this morning due to his focus on the productivity gains that he has said seem "unbelievable."

The "unbelievable" comment is just that. Mr. Greenspan doesn't think the productivity gains could be as robust as the numbers have indicated. If they are, then he expects to see some type of average increase in hours worked by workers to offset the recent productivity gains.

The MARKET seems to be taking Mr. Greenspan's testimony as if the Fed will be rather inactive in coming months on the interest rate front. Before today's testimony, the bond market was looking for the FOMC to actually raise interest rates by 1/4 point at their August 13th meeting to 2.0%, but today's bond market action looks to be discounting the probability of the Fed raising rates as we're seeing some rather volatile action from the bond market, with the 10-year YIELD falling to 4.887%.

What I think is taking place right now is that some nervous "economic bears" are doing a lot of short-covering in some of the beaten down stocks and locking in gains on fears that an economic recovery is indeed at hand.

For you and I, the key will be to AVOID the stocks that have been weak and stick with some of the more cyclical stocks at this point.

The probabilities are high that a stock that has been weak and heavily shorted becomes susceptible to a short-covering rally, but money can still flow toward bonds, causing a demand shortage of cash for stocks on a broader scale.

The risks of trying to pick a bottom in a stock at this point is that once some bears decide to stop covering, a stock that lacks any bullishness of buying from true bulls that believe the stock price or earnings for that stock are in recovery mode, will have the stock undergoing yet another pullback.

Yes, all stocks pull back after a move higher, but stocks that have been garnering bullish cash inflows, have a much higher probability of firming up on a pullback to support. A stock that has been trading new 52-week lows really has just one support level associated with it and leaves many investors wondering if that support will actually hold. Will there be bearish buyers at that level again?

A bull would never want to rely on a bear to help him out. If you're looking for a bull stampede, then you're not usually going to find a bunch of bears running along with the herd.

The investment/trading game is no different for the bears. I will continue to seek out those weak stocks that rally to a level of resistance that still look to have downside from their bearish vertical counts and where a bearish trader can control his/her risk.

Jeff Bailey
Senior Market Technician
Option Investor

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