Stocks rose yesterday for the seventh session in the past eight, as bank regulators in Basel, Switzerland, agreed to new restraints on lenders. The new agreement, known as Basel III, will be phased in over an eight-year period. This relieved many about imminent restraints, and means that the new rules should not have an immediate impact on earnings.

International markets had a strong day, helped by news that August Chinese industrial production grew at a rate of 13.9% year-over-year. China’s retail sales grew at a rate of 18.2%, which was also a surprise to many economists. 

And in the U.S. stock market, the banking sector was strong with JPMorgan Chase & Co. (NYSE: JPM) up 3.4%, Bank of America Corporation (NYSE: BAC) gaining 3%, and Citigroup Inc. (NYSE: C) up 2.1%. 

Merger-and-acquisition activity was strong, especially in the technology sectors. Hewlett-Packard Company (NYSE: HPQ) gained 0.2% following an agreement to buy security software maker ArcSight Inc. (NASDAQ: ARST) for $1.5 billion. Microsoft Corporation (NASDAQ: MSFT) said that it was planning a sale of debt to fund dividends and buybacks, and the stock jumped 5.3%. Intel Corporation (NASDAQ: INTC) was up 3.3% and Cisco Systems, Inc. (NASDAQ: CSCO) gained 3.1%. Semiconductors made gains with the Philadelphia Semiconductor Index (SOX) jumping 3.4%. And Apple Inc. (NASDAQ: AAPL) rose 1.4% on news that it plans to sell the iPad in China.

The euro was strong yesterday, up 1.3% to $1.2874 versus the U.S. dollar, helped by economic reports from the European Commission of improved economic conditions. 

At the close, the Dow Jones Industrial Average rose 81 points to 10,544, the S&P 500 gained 12 points to 1,122, and the Nasdaq was up 43 points at 2,286. 

The NYSE traded 935 million shares, and the Nasdaq crossed 578 million shares, both at volume levels much lower than average for prior Septembers. On both exchanges, advancers exceeded decliners by about 3.5-to-1.

Crude oil for October delivery rose 74 cents to $77.10 a barrel. The Energy Select Sector SPDR (NYSE: XLE) gained 44 cents, closing at $54.96. 

September gold rose 60 cents to $1,245.10, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) gained 0.43 points, closing at 185.63.

What the Markets Are Saying

This summer has befuddled some investors all of the time and all investors some of the time. Even the most astute and gray-headed pros have expressed their impatience over the lack of a sensible correlation between economic developments and stock prices.

One of my favorite technicians, Jeffrey D. Saut of Raymond James, in this week’s Investment Strategy, was reflecting on the S&P’s estimated earnings for this year at “around $83 and next year’s at around $95,” while trying to come up with a reasonable price-to-earnings ratio for the index. He said that some optimists are looking for a p/e of 20, while other more pessimistic types expect a multiple of 15. That means that the S&P should be priced somewhere between 1,140 and 1,425. 

That’s solid reasoning from a top analyst. But then he admits the reality that all of us must come to grips with if we are to remain sane investors, and it is this: “The stock market is truly fear, hope and greed only loosely connected to the business cycle.”

And that is what has turned many of us to the art of technical analysis. Fundamentalists may ruminate at length about what earnings and p/e ratios are or should be, but it is human behavior that dictates the final price, and that is what technicians attempt to predict. By focusing on the past reaction of people to circumstances, we assume (sometimes incorrectly, but more often accurately) that under similar circumstances, people will react the same way.

Thus, support and resistance zones are important because investors have made them important by their prior actions. As stock prices approach the important zone of resistance at the level of 1,130 on the S&P 500, which was established twice by sellers, we should expect to find sellers. So we will be alert for reversals and other signs that the current advance is about to be stopped. 

But human nature is not always consistent, so we don’t “know” that buyers will be overwhelmed by sell orders until it occurs. Perhaps this time it will be different, but the volume is very low and declining, so the chances are strong that the human response of fear will emerge and the resistance at 1,130 will take on even greater significance.

Get one stock to put on your watch list here.

Today’s Trading Landscape

Earnings to be reported before the opening include: BestBuy, Cracker Barrel, Kroger and Schiff Nutrition.

Earnings to be reported after the close include: MDS and Pall Corp.

Economic reports due: NFIB Small Business Optimism Index, ICSC-Goldman Sachs store sales, retail sales (the consensus expects 0.3%, and 0.4% ex-autos), Redbook and business inventories (the consensus expects 0.6%).

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.

The 10-to-1 Options Trading Secret — John Lansing reveals how to break down scientific chart analysis into easy-to-make trades that will have you trading, and profiting, with confidence in no time. Learn how to leverage your profits 10 times larger with a tiny investment. Download his FREE trading guide here.