Sam Collins

How to Play a Short-term Rally

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After two days of being clobbered for a total of 262 Dow points, stocks rallied yesterday, taking back 83 points, albeit on very light volume.

A rebound in financials and retail stocks was responsible for most of the gains. During the previous two-day drop, the financials gave up more than 4%, but yesterday they took back almost half of the losses, rising 1.9%.

Better-than-expected earnings from Home Depot (HD), up 3.1%, and advances from fellow Dow components American Express (AXP) and Alcoa (AA), each up more than 4%, helped the index.

Target (TGT), up 3.11%, led the retail group with its biggest gain since April -- the result of a smaller-than-expected loss. Saks (SKS) also rose on a smaller-than-expected profit decline, and the retail group gained 1.8%.

The market rallied despite news that housing starts and building permits for July faltered. Analysts were disappointed by the reported annualized rate of 581,000 and 560,000, respectively. But there were sighs of relief over producer prices for July, which declined 0.9%, suggesting that inflation is still under control.

At the close, the Dow Jones Industrial Average (DJI) gained 83 points, closing at 9,218, the S&P 500 (SPX) gained 10 points to 990, and the Nasdaq (NASD) rose 25 points to 1,956.

Volume on the NYSE totaled 991 million shares with advancers ahead of decliners by 4-to-1. On the Nasdaq, advancers led by just less than 3-to-1 on volume of only 541 million shares.