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An Odd Day

What a strange day Friday was.

Stocks put in an impressive day despite a University of Michigan consumer sentiment survey that can only be described as bearish.

Traders may have focused on the headline number, which was better than expected, but a look at the numbers behind the headline doesn't appear to bode well for consumer spending, the linchpin of the economy.

The 81.8 reading for September, down sharply from August's 91.5 number, was slightly better than analysts expected. But that was based largely on the first three weeks of the month. Sentiment actually rose slightly the week of the September 11 terrorist attacks - but then fell sharply the following week to 72.2, so the overall report could be masking a worrisome trend for the economy.

The Michigan survey comes out every two weeks, so investors will get a clearer picture of the effect of the attacks on October 12.

Investors did get some good news Friday in the form of a better-than-expected Chicago PMI survey, raising hope that the manufacturing sector may be turning up. The National Association of Purchasing Management survey this morning could add to that impression. But with consumer spending comprising two-thirds of the economy, the Michigan survey is probably the more important indicator to watch.

But Friday's rally qualified as a follow-through day to the rally that began last Monday, particularly on the NYSE, so the market has something to build on. However, Friday's volume was likely boosted by end-of-the quarter window dressing and rebalancing. Balanced funds in particular were probably very active on Friday, as they no doubt had to sell bonds and buy stocks after the worst quarter for stocks since the crash of 1987.

Tomorrow-Wednesday is a cycle turn window with a down bias (also coinciding with the Federal Reserve's decision on interest rates at 2:15 p.m. Eastern tomorrow). The most important cycle turn dates this month are shaping up to be October 11 and October 21-22, so a retest or lower lows heading in to those dates would be an ideal scenario.

Sentiment indicators are improving markedly after a summer of excessive bullishness. The Investors Intelligence survey has improved from 2-to-1 bullish to 33.7% bulls and 42.1% bears. Significant bottoms have in the past occurred with bulls under 30% and bears at 45%-50% or higher. And the commercial futures trades have reduced their S&P 500 short position the last couple of weeks, a positive trend because the market can't go very far without the smart money on board. In short, a lot for the market to build on this month.

The one negative, surprisingly, is the Nasdaq, which found itself in the unusual position of the laggard in last week's rally. The Nasdaq has gained 8% off its September 21 low, while the Dow has gained 9.7%, and the Nasdaq barely staged a follow-through rally on Friday. It would be more convincing if the market were to rally strongly together.