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Wednesday, September 27, 2006

Why The Market Has Been Rallying

By Yaser Anwar, CSC of Equity Investment Ideas

1) As the overall market has risen, there have been very few earnings warnings. In a bull market the Nasdaq usually leads the other indexes. The Nasdaq has been boosted by strong earnings in Oracle & Apple, to name a few. FedEx, GM & Merck (which got approval in a lawsuit after hours + AMD's lawsuit against Intel was not valid, hence another rally tomorrow?) for the Dow. Many flagship stocks with erratic earnings are becoming so optimistic that the analysts are getting worried.

2) Falling oil prices, a slower housing market, and falling inflation numbers (such as the Philly Fed survey but core CPI & health care inflation remains high) have all but eliminated the justification for another rate hike. Which is why we saw the market rally on the decision by Fed boss Bernanke's decision to leave rates unchanged.

3) Other than that- The April tax surplus was almost $119 billion where $58 billion was expected. With the economy growing GDP at 3%, the government is collecting an incredible amount of taxes. So much so, both the House and the Senate want to continue to cut taxes. So they’re extending the dividend relief and the capital gains tax cuts through 2010 and they installed the alternative minimum tax relief.

4) Even the trade deficit was about $5 billion better than expected thanks to a sliding dollar and soaring U.S. exports. How often have you heard about U.S. exports soaring? And yet, that’s exactly what is happening. Not to forget the strong consumer confidence yesterday.

5) Add in corporate profits up 28.5% in the past year, the fastest YoY growth in 22 years & investors expect to see the Dow march to 12,000.

6) In the end, the sentiment coming into September was also negative. With short interest close to 5 year highs, that also sparked a contrarian rally.

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