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Stocks hold session highs

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Stocks continue to hold session highs as depicted by the Dow Industrials (INDU) 8,533 +1.6% 135 point gain, with the broader S&P 500 Index (SPX.X) 902.90 +2.30 building a 20-point gain while the much broader NASDAQ Composite (COMPX) 1,403 +3% attempts to challenge its recent relative high close of 1,419, lead by gains in the NASDAQ-100 Index (NDX.X) 1,052 +3.96% and NASDAQ-100 heavyweight Microsoft (NASDAQ:MSFT) $56.87 +2.7% at it too challenges recent highs of $57.25.

As today's move looks bullish after this morning's retail sales numbers that showed a consumer somewhat stronger and willing to spend that economists had predicted, investors will then monitor tomorrow's economic data, which speaks toward the industrial level and how businesses are doing, and how they plan for the future.

If there's been one index that has concerned me and kept be very cautious toward technology, its the relative "lag" from the deeper cyclicals and the lack of enthusiasm by market participants toward this group of stocks, that under the scenario of a recovering economy, are usually a leadership group as business activity picks up, driving top and bottom-line growth for the deeper cyclicals that eventually renew their capital expenditures toward new technologies to increase their productivity and build out capacity.

There are some technical signs that the cyclicals, as depicted by the Morgan Stanley Cyclical Index (CYC.X) are perhaps starting to attract bullish capital and tomorrows economic data for September business inventories and October industrial production will be important insight to the shape of business activity, just as today's retail sales were a snapshot of the consumer.

Morgan Stanley Cyclical Index (CYC.X) - Daily Interval

In some of our past Index Trader Wraps, we did see how an old downward trend in the S&P 100 Index (OEX.X) 459 +1.89% served as support on some short-term pullbacks in late October, as the OEX struggled above downward trend, but when broken to the upside, served as support near the 450 level.

We're seeing some similar signs from the CYC.X, as it breaks back above its 21-day and 50-day SMA's, but also getting a bounce higher after testing old downward trend from our regression channel.

It's been noted in past commentary, specifically in March, when I thought that broader market equity bulls needed to see a confirming move higher in the CYC.X above the 505 level to bring a second leg to last summer's rally. As it turned out, the CYC.X never did "confirm" high and was eventually pulled lower as bullishness faded in the technology stock rally, bringing the cyclicals down and serving like a sledge hammer which had many of the major market averages trading new lows.

Just as we look to the retailers for some upside "confirmation" on the consumer, tomorrow we'll be monitoring the economic data along with the cyclicals to see if they confirm the renewed bullishness for technology stocks.

One stock we've mentioned in recent weeks that has been a strong stock in the cyclicals and a component of the CYC.X is shares of 3M (NYSE:MMM) $129.54, for a confirming break above the $130-132 level. The recent pullback in 3M from $130 found support at its rising 21-day SMA of $121 and once again the stock becomes closely watched with limited overhead supply should bulls get more confidence with the cyclical stocks and thoughts of a revived economy.

Jeff Bailey

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