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This rally deserves respect, though Nasdaq weakness glares

This week we awoke to an op-ed headlined, “How the Fed Saved the Economy” by Ben Bernanke, who is promoting his book, “The Courage To Act.”

By Thursday, you’d think the Fed had saved the markets by having the courage – or the anxiety – not to act by raising interest rates as many expected they would last month.

Stocks extended their bouncy nine-day revival Thursday after the minutes of the Fed’s “no change” meeting were taken to show a committee continuing to err on the side of lower rates for longer.

With the S&P 500’s (^GSPC) spurt above the 2000 level, the market has just about regained the benefit of the doubt that it had surrendered with faltering rebound attempts since August.

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In other words, the burden of proof is back on those who don’t believe that the Aug. 24 and Sept. 29 rebounds from below the 1900 level qualify as decent bottom for now.

Still, not everything is lining up in favor of continued immediate or impressive gains from here. It’s hard to start calling confidently for one of those scripted year-end chases to the upside just yet.

In the plus column, this rally has been broadly inclusive, has hurdled some tricky levels that had thwarted earlier advances and is still supported by the deep pessimism that spread among investors since August.

There was a broad retreat from stocks that has continued into this week, and many defensive players will start to feel under-exposed to stocks if they keep climbing.

The credit markets – a crucial arbiter of how much more stocks can run – have improved a bit from pressured levels, which has allowed the S&P to lift as it has.

Barclays bond strategists today are suggesting some stressed riskier corporate debt looks attractive in a low-rate, low-growth environment, so perhaps real money value seekers can firm up this sloppy sector a bit more. And the CBOE Volatility Index (^VIX) has settled down, finally cooperating with the bulls’ bid for a more “normal” fourth quarter environment.

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The internal flow of the stock rally, though, is making some traders squint in perplexity. Thursday, the Nasdaq (^IXIC) gained only half as much as the S&P 500 and Dow Industrials (^DJI) did, and the Nasdaq’s rise was far less broad.

The favored growth stocks that drive the Nasdaq have not done their part, with over-loved playthings  such as the biotech sector (IBB) and Apple Inc. (AAPL) conspicuously lagging.

The market run has been carried largely by the most broken and spurned sectors, such as energy, materials and industrials, which were dragging the tape lower for months before it succumbed in this correction.

I’d argue this is logical, but it’s not exactly typical. Industrials and related stocks are that were cheapened the most in the flight from risk and global-slowdown fright. Value stocks have long trailed growth stocks entering this downturn, and therefore have plenty of ground to make up.

This could be a fleeting rotation away from the marquee growth stocks, or a blip. And the leadership of industrial stocks could be taken as a good thing, a clue that global recession fears are easing.

But this action does at least raise the possibility that it’s mostly a snapback mean-reversion play at this point. The crowd was braced for more weakness in early October and got a straight-up rip instead.

The indexes are now a bit overbought in the short term. And at some point before too long, the move that would confuse the greatest number of traders might be a belated October scare.

Regaining the benefit of the doubt isn’t the same as promising a sure thing.

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