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Market Insider: Is This Rally for Real?

The first days of earnings season seem to have lit a fire under the stock market, but investors are wondering if this week's rally is for real or just a bunch of smoke.

For that matter, traders are too, and several quickly volunteered that the big move up Wednesday was more the result of short covering than any conviction buying. However, they also point to the slight improvement in market volume to 1.4 billion shares on the NYSE, up from the recent daily average of about 1 billion.

From 'Fast Money':

  • Will China Fuel A Continued US Rally Thursday?

Stocks have had their best three-day run since early March, when the tide turned for stocks. The Dow jumped 3 percent to 8616, its best day since March 23 and highest close since June 12. The Nasdaq was up 3.5 percent at 1862, and the S&P 500 jumped 3 percent to 932.

As stocks rose, the renewed interest in risk was apparent across all markets. The dollar fell about a percent against the euro. Oil climbed above $61 per barrel, and bonds sold off. The yield on the 10-year hit 3.596 percent.

Surprisingly good earnings reports from Goldman Sachs and Intel combined to create kindling for a stock market that had bet earnings season would be a disaster. The Intel report and its bullish comments about a recovery in the pc industry fueled buying in equities markets around the world. Goldman Sachs' strong report gave some hope that other financial companies could also best estimates.

It's no surprise that tech and financials were the best performing S&P sectors. The S&P technology group was up 4.2 percent Wednesday and was at its best level since October. The financials jumped 4.1 percent, scoring a 10.5 percent gain on the week.

On deck for Thursday is JPMorgan's report ahead of the opening bell. Analysts expect profits of $0.06 per share. "People expect it to be solid, not great. If it's just in line, they will bury it," said one trader. He added that if JPMorgan beats and gives positive guidance, its stock and the stock market could take off.

Rochdale Research analyst Richard Bove, said in a note that Goldman's strong results suggest that J.P. Morgan, considered the best of the major U.S. banks, will beat analysts' estimates. Bove said J.P. could benefit form the big corporate refinancing boom since it is the largest player in that market. He added though that its "Achilles heel" is its traditional banking business where it made some bad underwriting decisions.

Bove said nonperforming assets are being watched more than the actual earnings for the financial companies. "If they do what I think they are going to do, which is show that non-performing assets are growing at a much slower pace, I think that will give a lot of confidence to people who are now buying these stocks, expecting a turn around in the earnings next year," Bove said in an interview on "Fast Money."

Nokia , the telephone handset maker, also reports ahead of Thursday's bell, and what it says could be important to that sector. After the bell, there are major reports from technology giants Google and IBM . On Friday, Citigroup , Bank of America and General Electric report, and those stocks could be active ahead of the news.

Other items to watch Thursday include weekly jobless claims at 8:30 a.m. and Treasury international capital flows at 9 a.m. The Philadelphia Fed survey is reported at at 10 a.m. and the Housing market index is at 1 p.m. Overnight, China releases its second quarter GDP number, and that is being watched by foreign exchange and commodities markets.

Intersting to investors will also be former Treasury Secretary Hank Paulsen's 10 a.m. testimony before a Congressional committee on his role in the merger of Bank of America and Merrill Lynch.

Whither Stocks?

Brian Rauscher of Brown Brothers Harriman, turned bullish just as the stock market was ready to move higher in early March. With the dawn of earnings season, he says he is staying that way, for now, but is constantly looking for signs that the market run will end.

He says earnings season could be a positive, and he estimates companies could beat the second quarter's projected 30 percent earnings decline by 2.5 to 4 percent. "I don't think they're going to be negative. I think you could get enough juice to push this (the market) up to a new high," he said. Rauscher though says if the economy doesn't really improve, the third quarter earnings season could bring trouble.

"To significantly push this market higher, and I'm talking really higher, not 50 or 60 points, ... definitely through 1,000 or 1,100 (on the S&P 500), you need to see much better earnings than we're getting now," he said.

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"My understanding from talking to clients is the hedge funds were short going into the earnings season ... You now have the potential to go and test the new high which was 956. Will they be good enough to get you to 1,000? To get to that you're going to need someone (blue chip) to step up and say 'I have visibility, and I'm going to raise guidance."

Rauscher said the market has been correcting an overbought position in the last several weeks, and just as it could go higher, bad economic or earnings news could drive it back down to test the March lows.

"I am now looking for a train wreck. I don't see it. The data is telling me it's not around the next bend. I'm looking for early signs ..Hopefully, I'm wrong. Until then, let's enjoy," he said.

Questions? Comments? marketinsider@cnbc.com

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    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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