Stocks and bonds could continue to trade counter to recent trends Wednesday, traders said.
The Dow Tuesday jumped 103 points, or 1 percent to finish at 10,405, in its first win in six sessions. The Dow is also close to being unchanged for the year, down just 0.21 percent, a breakeven level that some traders say could draw in buyers.
The S&P 500 rallied 13 points, or 1.2 percent to 1092. Bond prices fell, moving inversely to yields. The 10-year yield rose to 2.632 percent, and the 30-year was at 3.765 percent. The dollar weakened, and commodities rose.
"We don't have any data in the U.S. and the data overnight is light, so I think as long as we don't come in with any further European concerns and if their bonds are even stable, the technicals are extended, sentiment is very high and we could further consolidate," said a bond trader.
"There's probably a little more left in this (stock rally) with the move lower in the bond market," said a stock trader of the rally. "It was just an oversold situation in equities."
There are no scheduled economic reports Wednesday, and there a just a few earnings, including Deere, Target andB.J. Wholesalereport before the market open. Applied Materials, Limited Brands, and Pet Smartreport after the bell.
It was a glass half-full day for stocks, which have been under pressure on concerns about a faltering economic recovery. The market gained traction on news of a $38 billion takeover bid for Potash and better-than-expected data. Industrial production delivered a positive surprise, rising 1 percent, above the 0.5 percent expected. The Dow was up as much as 178 points in the afternoon.
"It's mostly technical," said UBS director of floor operations Art Cashin, as the market rallied in the early afternoon. "When they managed to get through the first resistance down around 1090, you got a little bit of an after burn shot." Cashin said the next level the market would tackle if it continues to rise is the resistance at 1102/1103 on the S&P 500.
In the Treasury market, speculation circulated that the Fed would not embark on a bigger easing program, even as it purchased roughly $2.5 billion in Treasurys in its first market purchase since it reinstituted quantitative easing last week.
Just as the Fed's action last week was confusing to investors, there were competing views from two Fed officials Tuesday. Minneapolis Fed President Narayana Kocherlakota said the Fed's decision last week had a bigger impact on markets than he expected, and it should not be taken as a sign the economy is worse than investors thought.
Then St. Louis Fed President James Bullard, in an interview with the Wall Street Journal, said he sees about a 50/50 chance that the Fed will need to ease monetary policy even further.
The Fed last week warned it was more cautious on the economy and said it would purchase Treasurys with the proceeds from maturing mortgage securities it holds on its balance sheet. Many traders believe the Fed's move added to a negative tone in the stock market and a flight to quality trade in the bond market, as investor fears of a double dip recession increased.
BHP Billiton's $38 billion unsolicited offer for Canada's Potash, a favorite of the global agriculture trade, caught the imagination of investors Tuesday. Rivals Intrepid Potash, Mosaic, Agrium, and CF Industries all moved higher on dream bids of their own. The fertilizer space has been active, with CF buying Terra after a four way takeover battle, and Brazil's Vale buying Bunge's fertilizer unit.
Just before the opening bell, there was another smaller, cross-border deal announced. Again it was a strategic corporate play, but this time on the back end of food production. New Zealand Rank Group's Reynolds unit agreed to buy Illinois-based packaging company, Pactiv for $6 billion.
Citigroup chief U.S. equities strategist Tobias Levkovich said the deals are a good sign for the market, but not the start of a big merger wave. "We've always thought there would be a general pick up in m and a, but we doubt there will be a surge," he said in an interview.
Credit markets are open, but only for certain deals. He said he hears in general from merger and acquisition lawyers that they are seeing more preliminary discussions about potential acquisitions. "It's more selective. It's very targeted, and it's not across the board," he said.
Energy and technology are areas where there may be more deals, he said on "Squawk Box" Tuesday morning. A number of smaller tech deals have crossed the tape recently. Dell, just this week, sealed a deal to buy data storage provider 3Par for $1.15 billion, and Hewlett-Packard Tuesday said it was buying privately-held security software firm, Fortified Software.
Levkovich said corporate balance sheets make deal making more attractive, yet the environment is still too tentative for a deal boom despite the piles of cash held by corporations. "You need business confidence. You need a market that's willing to finance most deals, instead of selective ones and you need willing sellers," he said.
Companies may not be as ready to sell now that they've gone through the recession and are poised for growth, but the allure of capturing that growth may certainly attract buyers. "We could see more hostile deals," he said.
The Pattern of Threes
Jeffrey Kleintop, in a note Tuesday, points out that each of the three quarters this year have been marked by three separate growth scares. A slowdown in China was the big worry in the first quarter, and that gave way to concerns about Europe as it struggled in the second quarter with its sovereign debt crisis. Now, it's the U.S. turn, and the economy has bee showing a deceleration in growth.
In the first two quarters, markets hit their lows at the midpoint of the quarter, just before a policy announcement that reversed investor sentiment, he noted. But Kleintop, chief market strategist at LPL Financial, says the U.S. missed its opportunity with the Fed action last week.
"Without a potent policy driver, the fear surrounding the U.S. outlook may not dissipate as quickly this quarter as it did during the first two quarters of the year and linger into the fourth quarter," he wrote.
He also suggests that the mid-quarter policy driver in the fourth quarter may turn out to be the U.S. mid-term elections in November, and that may be powerful enough to give the stock market gains for the year.
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