Stocks Soar on Heavy Volume as Economic Pessimism Diminishes

Indices
S&P 500 1,497.49 +1.41%
DJIA 13,657.86 +1.14%
NASDAQ 2,612.98 +2.01%
Russell 2000 795.64 +2.78%
Wilshire 5000 15,006.42 +1.48%
Russell 1000 Growth 601.30 +1.44%
Russell 1000 Value 839.08 +1.33%
Morgan Stanley Consumer 727.48 +1.08%
Morgan Stanley Cyclical 1,043.75 +1.27%
Morgan Stanley Technology 638.34 +1.58%
Transports 5,079.39 +1.44%
Utilities 506.73 +.70%
MSCI Emerging Markets 134.69 +2.8%

Sentiment/Internals
Total Put/Call .98 -4.85%
NYSE Arms .79 +9.21%
Volatility(VIX) 21.45 -.51%
ISE Sentiment 121.0 +137.25%

Futures Spot Prices
Crude Oil 72.25 -.23%
Reformulated Gasoline 193.42 -.51%
Natural Gas 6.25 +.85%
Heating Oil 197.24 +.42%
Gold 685.40 +.45%
Base Metals 247.55 -1.17%
Copper 344.80 -1.67%

Economy
10-year US Treasury Yield 4.86% +10 basis points
US Dollar 80.34 -.18%
CRB Index 313.05 +.09%

Leading Sectors
Homebuilders +5.0%
REITs +4.06%
Internet +3.37%

Lagging Sectors
Defense -.31%
Tobacco -.60%
HMOs -3.13%

Evening Review
Market Performance Summary
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Sector Performance
ETF Performance
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After-hours Commentary
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In Play

Afternoon Recommendations
Bank of America:
- Rated (PCLN) Buy, target $96.
- Rated (EXPE) Buy, target $35.

Afternoon/Evening Headlines
Bloomberg:
- US stocks continued their recovery from a three-week rout after Cisco Systems(CSCO) raised its sales forecast and speculation increased that banks and homebuilders may have weathered the worst of a subprime mortgage shakeout.
- Volume on the Nasdaq exchange hit 3.67 billion shares today, the second highest volume day on record.
- President Bush and Treasury Secretary Paulson played down gyrations in financial markets and said the US economy is “strong”, requiring no change in government policy.
- William Dunkelberg, chief economist at the National Federation of Independent Business sees “no major threat” in credit markets.
- The risk of owning corporate bonds fell again as concerns eased that losses from subprime mortgages will slow the US economy.
- US Housing and Urban Development Secretary Alphonso Jackson said the government may raise the limit on purchases of home loans by Fannie Mae(FNM) and Freddie Mac(FRE) in order to increase liquidity in the mortgage market.
- Crude oil fell again in NY, reversing earlier gains, after a report showed declining US gasoline consumption as US oil inventories remain near decade highs.
- Honda Motor(HM) said its FCX fuel-cell car is the first hydrogen-powered auto to qualify for a US tax credit aimed at promoting vehicles that don’t use petroleum-based fuels.
- American International Group(AIG), the world’s largest insurer, said second-quarter profit rose 34%.
- France has increased security controls on trains in the east of the country after receiving a tip about a terrorist threat.

BOTTOM LINE: The Portfolio finished higher today on gains in my Internet longs, Semi longs, Retail longs, Biotech longs and Medical longs. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was very positive today as the advance/decline line finished substantially higher, most sectors rose and volume was very heavy. Measures of investor anxiety were high into the close despite gains. Today's overall market action was very bullish. The Nasdaq and small-caps were especially strong. Nasdaq volume hit the second-highest on record today at 3.67 billion shares. I continue to believe the Nasdaq will substantially outperform the other major averages through year-end. As I said a couple of months ago, cyclical tech has joined growth tech in leadership, which is making for a lethally bullish combination. The Morgan Stanley Tech Index is 12.8% higher year-to-date. Growth outperformed value again today, with small-cap growth leading the way as it soared 3.6%. While the Russell 2000 is lagging for the year, it is solely a function of the weakness in small-cap value shares, which are down 3.9% year-to-date. Small-cap growth is 7.7% higher so far this year, outperforming the S&P 500. In my opinion, the argument over whether growth or value investing is a better long-term strategy isn't really the question. The question is where we are in the cycle. I continue to believe a major shift is beginning to take place into growth and away from value and that this new trend will last for several years at least. Despite better energy inventory data and less global economic pessimism today, oil was unable to rally, which is another bearish sign for the commodity. I suspect it will head into the $60s/bbl. within two weeks, barring a hurricane fear spike. I continue to believe a natural gas long hedge for a short crude position will work well for a few weeks. Today's late afternoon swoon likely left more bulls underinvested and more bears even more short. There are so many signs of investor skepticism regarding the huge surge from Monday's lows that I doubt a retest of those lows will occur. Headlines are still scary, and anxiety is still high. Too many bulls are still underinvested, and too many bears are still too short. Moreover, and most importantly, many market-leading stocks are breaking out on very large volume. That doesn't mean we can't pull back or rest for a bit, but I think a retest of the lows is unlikely.