Market Rally Sparked by Easing Worries, Short Covering

The Wall Street bulls turned up the after burners thanks to a sizzling deal sector and indications that the consumer is holding up in spite of a rash of housing foreclosures. A round of early afternoon short covering further propelled Wall Street.

Those factors were enough to shove concerns about rising crude oil and a falling dollar into background and spur the Dow Jones Industrial Average and the Standard and Poor's 500 to record closing highs.

The Dow's 284-point rise was the biggest point gain since 2002, with buying across industry groups ranging from mining stocks to chips and recently battered financial shares.

Shorts, or those betting against the market, were caught off guard, according to Sam Stovall, Standard & Poor's chief investment strategist. "Just yesterday we noted an increasing amount of bearishness out there due to oddlot short sales, July put open interest and a still elevated Volatility index that was a contrary indicator and bullish," he said.

Stovall calls this a "Mae West market": "mergers, acquisitions and earnings -- with the connection to the screen siren being the resilience of this market calling to anxious bears with cash on the sideline to 'come up and see me sometime.'"  

"News yesterday of trouble with Sallie Mae deal sent worries through the market of a private equity shutdown, but with the maneuvers involving Alcan and Alcoa , suddenly today worries about private equity and subprime are priced out," said Tony Dwyer, equity market strategist at FTN Midwest Research.

Dwyer also pointed to investor relief after major retailing chains like Wal-Mart and JC Penney reported stronger than expected June same-store sales.

"Earnings have been overly conservative for the last 15 quarters, since the end of the recession and the start of Sarbanes-Oxley," said Dwyer. "CEOs are unwilling to pre-announce stronger-that-predicted earnings versus a willingness to pre-announce worse than expected numbers. Sarbanes has left CEOs wanting to make sure their numbers are right, so they don't pre-announce positive surprises."

Dwyer said hearing only about negative earnings surprises has led to gloomier expectations for earnings ahead of each quarter's reports which end up being handily exceeded.

Tomorrow, market focus will be on earnings from General Electric, the parent company of CNBC, and June retail sales.

"Retail sales (reported by chain stores) did give some assurance to the markets," said Gary Shilling, president of portfolio manager A. Gary Shilling & Co., but he continues to see housing and subprime as an ever present threat.  "The big negative is housing, led by the collapse in the subprime market," he said. "Daily you get increased reports of big problems."

Housing hasn't been able to trip up the markets. Shilling noted that "the stock market occasionally sells off on subprime woes, but then all is forgiven as convictions persist that housing is not going to have any spreading effect."

But he warned that "housing turns down before the overall economy sometimes by more than a year."

Shilling is sticking to his longer term forecast that a big share of returns from the stock market in the years ahead will come from dividends, not price appreciation.

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