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Stocks in Chipper Mood

Liz Rappaport

Blue-chip stocks shook off a selloff in China to reach new highs.

The major market indices put in a narrowly mixed performance Thursday, but their solid showing speaks to Wall Street's improved mood this spring.

As they did Feb. 27, U.S. investors awoke Thursday to news that world stocks were selling off amid worries that the Chinese government might put the brakes on growth.

But a repeat of February's panicky 416-point drop on the Dow Jones Industrial Average wasn't in the works. Instead of worrying about inflation, rate-hike prospects and the far-off possibility of a global liquidity crisis, investors took reports of 11.1% GDP growth in China as a reminder that there's plenty of good news out there, too.

"China wants to see growth at 10% -- explain how that is bad," says Art Hogan, chief market analyst at Jefferies & Co. "A strong Chinese economy is good for the planet."

The Dow, after opening down and sliding about 70 points, ended the day up 5 points at 12,808. The S&P 500 fell 2 points to 1470.73, and the Nasdaq Composite slipped 5 to 2505.35.

The Dow Jones Transportation Average, encompassing many of the stocks that have outperformed in the global economic growth story, ended the day up 0.6%.

Overnight in Asia, China's Shanghai Index dropped 4.7%, while Hong Kong's Hang Seng fell 2.3% and Japan's Nikkei slid 1.7%, as investors recognized that fast growth and higher-than-expected inflation in China could lead to more tightening of its monetary policy. In Europe, London's FTSE slipped 0.1%, while Germany's DAX fell 0.5%.

The fact that there was no selloff in the U.S. points to the resolution of several concerns haunting investors in late Feburary's plunge. China's 9% one-day drop then added to fears about rising defaults in the subprime mortgage market.

This time, investors are relieved that the subprime mortgage problems haven't exploded into a financial crisis, and that no massive hedge fund blew up as the yen carry trade unwound. They are relieved that the job market remains strong, the consumer keeps spending, and that earnings are better than expected.

"There is more good news than bad news, and that is what the market is trying to price in," says Hogan.

Others warn that complacency has gotten out of control and that the march of new highs is about to end. Market Vane's measure of sentiment among futures traders is 74% bullish -- a two-year high.

"It looks like we're due for a correction again, but a correction within a bull market, not the start of a new bear market," says Rich Ishida, chief technical analyst at Market Vane. "Smart money is comfortable buying the dips."

Ishida notes that sentiment dropped only to 62% after February's correction, which was a sign at the time that the market would quickly ramp back up.

Dick Arms, technician and contributor to RealMoney.com, TheStreet.com's investing-ideas site, calls the market "disturbing" right now. Arms, who is creator of the Arms Index, which compares advancing to declining stocks to advancing and declining volume, says he is flat Thursday -- meaning he's out of all stock investments.

Arms says he is wary of weak advancing volume in the march to new highs Thursday, and his index reveals "extremely overbought" conditions. Arms notes also that the reading on the CBOE Volatility Index, while up 2.9% Thursday, remains near the low end of its 52-week range at 12.78. It surged to a reading over 19 on March 5, when fears were at their peak.

A correction may be at hand, but the underlying global liquidity story remains intact. Even the persistently falling dollar can help keep the liquidity spigot open, given the global monetary policy landscape, says Michael Darda, chief economist at MKM Partners. As the dollar falls, foreign central banks tend to prevent too much appreciation in their own currencies, so they don't get too tight, he says.

And, technical indications aside, earnings are beating estimates, and that's keeping the market happy. Thursday's news brought a mixed bag of reactions despite a majority of above-estimate reports.

eBay(EBAY Quote - Cramer on EBAY - Stock Picks) beat estimates and raised its guidance, but slipped 3.7% Thursday. Nokia(NOK Quote - Cramer on NOK - Stock Picks) reported earnings that met expectations, and its shares surged 3.3%.

After the close, Google(GOOG Quote - Cramer on GOOG - Stock Picks) screamed past estimates, sending its shares up 2% in after-hours trading. Advanced Micro Devices(AMD Quote - Cramer on AMD - Stock Picks) was falling 6% in postclose trading after it disappointed investors.

Elsewhere, Merck(MRK Quote - Cramer on MRK - Stock Picks) and UnitedHealth(UNH Quote - Cramer on UNH - Stock Picks) posted in line profits, sending Merck up 1% while UnitedHealth fell 4%.

Schering-Plough(SGP Quote - Cramer on SGP - Stock Picks) and Wyeth(WYE Quote - Cramer on WYE - Stock Picks) also beat estimates, but Wyeth warned of drug delays. Wyeth slipped 1.2% Thursday, while Schering-Plough gained 8.9%.

In the continually surprising financial sector, American Express(AXP Quote - Cramer on AXP - Stock Picks) beat expectations and added 0.9% on the day, while Bank of America(BAC Quote - Cramer on BAC - Stock Picks) and Merrill Lynch(MER Quote - Cramer on MER - Stock Picks) soared past predictions. Even so, Bank of America fell 1.8% and Merrill Lynch slid 0.6%.