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Encouraging Signs for Stocks?

Bob Pisani is off; this post was written by CNBC producer Robert Hum.

It has been a nice bounce back for stocks over the past couple of weeks. After falling about 8 percent off their January highs just 2 weeks ago, big cap indexes (Dow Industrials and S&P 500) are now just 3 percent off their highs.

But bulls note the advance has been broad-based, with notable leadership from mid cap and small cap stocks. The S&P Midcap Index has now recovered an impressive 80% of the losses it accrued from mid January to the beginning of February, while the small-cap Russell 2000 Index has regained 75% of its own losses. That’s significantly better than the recovery of the large cap indexes, which have only recouped 50%-60% of their earlier declines.

More bullish signs for investors:

1) Lowry’s, one of the oldest technical analysis firms on the Street, notes that buying demand for stocks is now at its strongest levels since June 2009. Furthermore, investors also seem to be “reluctant to sell at current prices,” with selling pressure hitting new lows.

Putting together those two factors, Lowry’s believes the markets are in “the lowest risk period for new buying,” reaffirming the lengthy rally the markets have put together since hitting multiyear lows last March. In fact, with the current absence of typical market correction red flags (low buying demand and heavy selling pressure), it suggests that the market’s recent correction “has run its course and a new leg higher…has begun.”

2) Meanwhile, Citigroup’s Tobias Levkovich expects further upside to the markets in the near-term. In his report this morning, he suggests the S&P 500 could rise another 10%-15%, propelled by the likelihood of strong 2010 earnings and better economic data.

Bears, however, warn of possible headwinds ahead:

a) Greece’s debt situation remains very clouded. Attention will be on how much Greece will have to pay investors to entice them to buy an expected 3 billion to 5 billion Euros in bonds over the next week or so.

Meanwhile European Union and German officials denied German media reports over the weekend that a 20 billion to 25 billion Euro aid package for Greece was in the works.

b) Commodity stocks – one of the market’s leadership groups since the March lows – could fall under more pressure if the U.S. Dollar continues to climb in the days and weeks ahead. Already right near a 7-month high, the Dollar could get more support if global macroeconomic factors cause investors to flee to the safety of the greenback.

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