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Traders Watch to See If 'Most Hated Rally' Can Get Lift Off From 1,400

Traders are watching to see if the S&P 500 can break meaningfully above 1,400, a three-month high water mark for the stock market, which could help propel it toward a new high for the year.

NYSE trader
Oliver Quilla for CNBC.com
NYSE trader

The S&P broke 1,400 Tuesday for the first time since May, and added slightly to its gain Wednesday, rising less than a full point to close at 1,402. The Dow , meanwhile, was up 7 at 13,175, and the Nasdaq was 4 points lower at 3,011. The S&P hit its 2012 high of 1,422 in April.

While stocks have gained in the past four sessions, some traders have been skeptical of the move. At the same time, Treasury yields have risen, with the 10-year reaching 1.642 Wednesday, its highest level since June 29. The prospect of possible Fed and European Central Bank easing has helped lift stocks and bond yields, while Friday’s better-than-expected July jobs report also gave stocks a boost.

“I’m actually feeling relatively good about the market. History and technicals point to a move higher, whereas economics and fundamentals cause investors to be very cautious,” said Sam Stovall, chief U.S. equity analyst with S&P Capital IQ. The 1,400 level is viewed as a key psychological mark.

Thursday’s weekly jobless claims, reported at 8:30 a.m. ET, is the first fresh employment data since the July jobs report showed the surprise addition of 163,000 nonfarm payrolls. Claims are expected to be 370,000, up slightly from last week. There is also international trade data at 8:30 a.m., and wholesale inventories at 10 a.m. Overnight reports from China on inflation, industrial production and retail sales could also be important factors.

But while the stock market has been rising, its critics point to a world of worries, including slower profit growth, weaker U.S. data, a faltering global economy and other looming events, like the U.S. fiscal cliff and more fallout from the European debt crisis. The “fiscal cliff” is the dual expiration of tax cuts Dec. 31 and the automatic spending cuts that could take effect starting Jan. 1 if Congress does not take action.

“This is the most hated rally in a long time. The S&P is up 9 percent since June 1, yet four of the five sectors that were the best performers were defensive in nature,” Stovall said. Those included telecom, health care, energy and consumer staples. Financials were also outperformers.

Stovall said investors’ concerns about earnings are valid. For instance, third quarter earnings are expected to show a decline of 1.5 percent.

“What’s helping (stocks) is two-fold. One is anticipated stimulus from the ECB and from the Fed sometime in the pre-election period, and second is the prospect that a year from now the economic outlook and forward earnings projections will be a lot more optimistic,” he said.

Stovall said the S&P also worked through an inverse head and shoulders pattern, or a reversal pattern which took it to 1,400. “When you look through the channels and you look at resistance, there’s really not that much,” he said.

If history is a guide, he notes that that 12 months after a severe correction, like the 19 percent decline last year, the S&P has an average gain of 32 percent. “A 32 percent gain off of last year’s 1,100 level would bring you to 1,450 and change,” he said.

Central Bank Put

Traders have been buzzing about a big investor who made a made a sizeable purchase of August S&P 500 calls, right ahead of the Fed and ECB meetings last week. “It felt like that customer was doing it to get ahead of (ECB President Mario) Draghi coming out and doing something dramatic that would cause a big spike in the market. We’ve had a rally since then but options are a decaying asset, and he seems to be unwinding it because he didn’t get the pop he was hoping for, or he’s doing something else.” said Patrick Kernan of Cardinal Capital Management.

“Initially, it had a big impact on the market, a big spike in volatility and out-of-the-money calls because the street had gotten so short,” he said. But Kernan said the investor seemed to have unwound that position Wednesday, and as result, the VIX, the CBOE volatility index, declined four percent.

“Now volatility is extremely low and implying we’re not going to see a move here for the near-term. Given the flow, it kind of feels like the way the order flow has been, it would be reflective of a slow trickle up, as opposed to down,” Kernan said. He said the premium on S&P 500 options, for the August expiration a week from Friday, is now 25 percent cheaper than it was just a month ago. “That means the market’s feel there’s an implied put option being provided by the world’s central banks,” he said.

What Else to Watch

The Treasury auctions $16 billion in 30-year bonds Thursday, at 1 p.m.

CRT Capital chief Treasury strategist David Ader said it was this week’s supply and an illiquid late summer market that drove yields higher Wednesday. The Treasury had auctioned $24 billion 10-year notes Wednesday at a yield of 1.68 percent, sharply higher than the 1.63 percent the notes were yielding prior to the auction.

“The positions are simply flat,” he said. “I just don’t think there’s a whole lot of room for people to be forced to buy or do I feel there’s a lot of need for people to be forced to sell.”

There are also some earnings expected Thursday, including Kohl’s, Tim Hortons, AMC Networks, Advanced Auto Parts and Manulife Financial, before the bell. Companies reporting after the close include Nordstrom, Lions Gate, DeVry and Scott’s Miracle-Gro.

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  • Patti Domm

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

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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