Stocks Sharply Higher into Final Hour on Bargain Hunting, Short-Covering and Positive Economic Data

BOTTOM LINE: The Portfolio is substantially higher into the final hour on gains in my Computer longs, Internet longs, Biotech longs and Semi longs. I took profits in some more of my (EEM) short, added to my Apple Computer(AAPL) long and exited the remainder of my (QQQQ) and (IWM) shorts this morning, thus leaving the Portfolio 100% net long. The tone of the market is very positive as the advance/decline line is substantially higher, almost every sector is higher and volume is heavy. The AAII percentage of Bulls remained unchanged at 26.41% this week from 26.23% the prior week. This reading is still at depressed levels. The AAII percentage of Bears soared to 54.98% this week from 45.08% the prior week. This reading is now at very elevated levels. The percentage bears is the highest since February 2003. The S&P 500 has rallied 57% since bearish sentiment hit this level. I expect bullish sentiment to rise next week. I continue to believe overall investor sentiment toward U.S. stocks is at levels associated with meaningful market bottoms. I expect US stocks to trade mixed-to-higher into the close from current levels on more short-covering and bargain hunting.

Jobless Claims Healthy, Manufacturing Mixed, Foreign Security Purchases Fall, Capacity Utilization Declines, Prices Paid Falls

- Initial Jobless Claims for last week fell to 295K versus estimates of 320K and 303K the prior week.
- Continuing Claims rose to 2425K versus estimates of 2425K and 2410K prior.
- Empire Manufacturing for June rose to 29.0 versus estimates of 11.0 and a reading of 12.9 in May.
- Net Foreign Security Purchases for April fell to $46.7B versus estimates of $60.0B and $70.4B in March.
- Industrial Production for May fell .1% versus estimates of a .2% rise and a .8% gain in April.
- Capacity Utilization for May fell too 81.7% versus estimates of 81.9% and 81.9% in April.
- The Philly Fed Index for June fell to 13.1 versus estimates of 11.0 and a reading of 14.4 in May.

BOTTOM LINE: The number of Americans filing first-time claims for unemployment benefits unexpectedly fell last week to a four-month low, evidence the labor market is holding up as the economy slows, Bloomberg said. The four-week moving average fell to 315,750 from 328,000 the prior week. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, remained at 1.9%. This report adds to mounting evidence that the economy is not slowing too much. I continue to believe the labor market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

Manufacturing growth in NY state unexpectedly accelerated this month, Bloomberg reported. The outlook component of the index increased to 33.7 versus 30.2 the prior month. The new orders component surged to 25.8 versus 16.2 in May. The prices paid component rose to 52.9 from 43.1 the prior month. The employment component declined to 5.1 from 9.7 in May. I continue to believe manufacturing is in the process of slowing to more average levels.

International investors slowed purchases of US securities in April, Bloomberg reported. Foreign purchases of US stocks slowed to $6.5 billion from $19 billion the prior month. I expect foreign demand for US assets to surge in May on a flight to quality, relative strength in US stocks and a rising dollar.

Industrial Production in the US unexpectedly fell last month for the first time since January as the economy began to slow, Bloomberg reported. Production of consumer durable goods, which include automobiles, furniture and electronics, fell .8% versus a .4% fall the prior month. Capacity Utilization is now slightly above the long-term average of 80.7%. I expect factory production and capacity utilization to continue to head lower, back to average levels, over the intermediate-term.

Manufacturers in the Philly area expanded at a slower pace in response to higher energy prices and cooling demand, Bloomberg said. The new orders component of the index rose to 17.7 this month from 2.7 the prior month. The prices paid component fell to 48.7 from 55.3 the prior month and 66.7 in October of 2005. The employment component of the index rose to 6.8 versus 1.1 in May. I continue to believe manufacturing is in the process of slowing to more average rates. Prices paid have most likely peaked for this cycle.

Links of Interest

Market Snapshot
Detailed Market Summary
Market Internals
Economic Commentary
Movers & Shakers
Today in IBD
NYSE OrderTrac
I-Watch Sector Overview
NYSE Unusual Volume
NASDAQ Unusual Volume
Hot Spots
NASDAQ 100 Heatmap
DJIA Quick Charts
Chart Toppers
Option Dragon
Real-time Intraday Chart/Quote

Thursday Watch

Late-Night Headlines
Bloomberg:
- Business sentiment among Japanese manufacturers rose to a record in June, the Reuters monthly Tankan survey showed.
- China’s Premier Wen Jiabao told local governments and banks to tighten lending for investment projects as the government seeks to prevent excess capacity from building up in some industries.
- L. Paul Bremer III, the former US administrator in Iraq, said it would be a mistake to set a timetable for withdrawing American troops from that country.
- China’s central bank said it will intensify efforts to drain capital from the country’s financial system to cool surging money supply and lending growth.

Economic Daily News:
- AU Optronics(AUO) expects prices of liquid-crystal display panels to stabilize from next month as demand improves, citing Lee Kun-yao, the company’s chairman.

CNET :
- Dallas Mavericks owner and billionaire Mark Cuban invested in a journalism Web site dedicated to publicizing corporate fraud.

Late Buy/Sell Recommendations
- None of note

Night Trading
Asian Indices are +.25% to +1.0% on average.
S&P 500 indicated +.18%.
NASDAQ 100 indicated +.24%.

Morning Preview
US AM Market Call
NASDAQ 100 Pre-Market Indicator/Heat Map
Pre-market Commentary
Before the Bell CNBC Video(bottom right)
Global Commentary
Asian Indices
European Indices
Top 20 Business Stories
In Play
Bond Ticker
Daily Stock Events
Macro Calls
Rasmussen Consumer/Investor Daily Indices
CNBC Guest Schedule

Earnings of Note
Company/EPS Estimate
- (ADBE)/.30
- (BSC)/3.12
- (JW/A)/.24
- (KBH)/2.42
- (OVTI)/.38
- (PIR)/-.26

Upcoming Splits
- (AIT) 3-for-2
- (BMI) 2-for-1
- (CLDN) 3-for-2
- (DDE) 3-for-2
- (IIIN) 2-for-1
- (OII) 2-for-1
- (PARL) 2-for-1

Economic Releases
8:30 pm EST
- Initial Jobless Claims for last week are estimated to rise to 320K versus 302K the prior week.
- Continuing Claims are estimated to rise to 2425K versus 2415K prior.
- Empire Manufacturing for June is estimated to fall to 11.0 versus a reading of 12.4 in May.

9:00 am EST
- Net Foreign Security Purchases for April are estimated to fall to $60.0B versus $69.8B in March.

9:15 am EST
- Industrial Production for May is estimated to rise .2% versus a .8% gain in April.
- Capacity Utilization for May is estimated at 81.9% versus 81.9% in April.

12:00 pm EST
- The Philly Fed for June is estimated to fall to 11.0 versus a reading of 14.4 in May.

BOTTOM LINE: Asian indices are higher, boosted by technology stocks in the region. I expect US equities to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Stocks Finish at Session Highs on Short-Covering and Rebound in Commodity Stocks

Indices
S&P 500 1,230.04 +.52%
DJIA 10,816.92 +1.03%
NASDAQ 2,086.00 +.65%
Russell 2000 677.09 +.65%
Wilshire 5000 12,327.68 +.49%
S&P Barra Growth 572.15 +.72%
S&P Barra Value 655.80 +.32%
Morgan Stanley Consumer 597.27 +.63%
Morgan Stanley Cyclical 783.45 +.82%
Morgan Stanley Technology 475.94 +.71%
Transports 4,470.94 +.67%
Utilities 403.95 -.68%
Put/Call 1.12 -20.0%
NYSE Arms .59 -55.10%
Volatility(VIX) 21.46 -9.87%
ISE Sentiment 89.0 -29.92%
US Dollar 86.11 -.43%
CRB 332.03 +.55%

Futures Spot Prices
Crude Oil 69.19 +.07%
Unleaded Gasoline 203.75 +.08%
Natural Gas 6.59 +6.93%
Heating Oil 193.59 +.22%
Gold 557.50 -1.59%
Base Metals 199.99 +1.61%
Copper 303.00 -.85%
10-year US Treasury Yield 5.05% +1.94%

Leading Sectors
Steel +3.11%
Oil Service +2.71%
Energy +2.56%

Lagging Sectors
Utilities -.68%
HMOs -.82%
Banks -1.06%

Evening Review
Detailed Market Summary
Market Gauges
Daily ETF Performance
Style Performance
Market Wrap CNBC Video(bottom right)
S&P 500 Gallery View
Economic Calendar
Timely Economic Charts
GuruFocus.com
PM Market Call
After-hours Movers
Real-time/After-hours Stock Quote
In Play

Afternoon Recommendations
UBS:
- Upgraded (SND) to Buy, target $70.

Afternoon/Evening Headlines
Bloomberg:
- Papa John’s Intl.(PZZA) plans to open 500 stores in India over the next decade as it seeks to grow internationally.
- The Bush administration wants Marathon Oil Corp.(MRO), Kerr-McGee(KMG) and 54 other oil and gas producers to renegotiate Gulf of Mexico drilling leases that let them avoid paying as much as $10 billion in government fees.
- Interest-rate futures are suggesting for the first time that the Fed will raise interest rates in August after US consumer prices excluding food and energy rose more than forecast.
- Gold fell for a seventh straight session, matching the longest slide since July 2004, as speculators continued liquidating positions in the metal.

BOTTOM LINE: The Portfolio finished about unchanged today as gains in my Retail longs, Networking longs and Semi longs offset losses in my Energy-related and Base Metal shorts. I did not trade in the final hour, thus leaving the Portfolio 50% net long. The tone of the market was slightly positive today as the advance/decline line finished slightly higher, sector performance was mixed and volume was above average. Measures of investor anxiety were mostly lower into the close. Overall, today's market performance was mildly bullish. Commodity stocks paced today's advance, which is a negative for the broad market. As well, financials underperformed throughout the day, and a number of market-leading equities did not participate in today's gains. I would like to see a higher quality advance before further increasing market exposure.

Stocks Mostly Lower into Final Hour on Interest Rate Concerns

BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Computer longs, Internet longs and Energy-related shorts. I took profits in some of my (EEM), (QQQQ) and (IWM) shorts this morning and then added back to them, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is lower, sector performance is mixed and volume is heavy. We got a supposedly bad inflation number this morning. Fed members are making hawkish comments. The U.S. dollar is lower. Long-term rates are higher. Oil is rising. This should be helping gold at least bounce, considering it has fallen 25% in a month. Instead, gold is trading down another $9 per ounce to session lows. Its weakness is telling. I expect US stocks to trade mixed-to-lower into the close from current levels on worries over higher long-term rates and oil prices.