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What a Week: Investors Hear Evil, See Evil, Laugh in Evil's Face

Aaron Task

SAN FRANCISCO -- The key this week was to gravitate toward the center, both the emotional center and the middle of the week. Things weren't as bad as they looked Monday morning nor as good as they appeared early Friday. But in between, investors proved deft in handling more disappointments from bellwether companies.

Midweek strength in the face of adversity reinforced predictions that major averages, notably the Nasdaq Composite, have indeed seen their final lows -- and finally established a solid, sustainable bottom, in other words.

The combined wisdom of market staples, "Don't fight the Fed" and "Don't fight the tape" suggests "the message of the markets is clear: It is a good time to own stocks," John Bollinger, founder of BollingerBands.com in Manhattan Beach, Calif., commented Friday afternoon.

Investors similarly disposed mainly chose growth stocks this week, helping the Nasdaq Composite rise 9.1%, its first weekly gain since early December. The S&P 500 gained 1.6% while the Dow Jones Industrial Average shed 1.3% as investors moved away from the defensive and cyclical groups that exert a big influence on the venerable index.

The optimism at week's end starkly contrasted with the consternation at the week's onset.

Festering memories of the depressing end to the prior week weighed heavily on sentiment early Monday. The dour mood sent market proxies reeling early on, with growth favorites such as BEA Systems (BEAS Quote - Cramer on BEAS - Stock Picks) and Protein Design Labs (PDLI Quote - Cramer on PDLI - Stock Picks) suffering outsized losses.

But stock averages rebounded sharply in the final hour. Once as low as 10,516.02, the Dow closed down 0.4% to 10,621.35. Similarly, the S&P 500 ended off 0.2% to 1295.86 vs. an intraday low of 1276.31, while the Nasdaq rallied back from an initial decline below 2300 to finish down 0.5% at 2395.92.

Monday's snapback proved to be a precursor of better days to come for those long.

Shades of Yesteryear

Disappointing news from Nokia (NOK Quote - Cramer on NOK - Stock Picks) sent the cell-phone maker down 9% Tuesday, but broader market averages mainly shrugged off the developments. The S&P 500 rose 0.4% and the Nasdaq Composite gained 1.9%. The Dow, however, fell 0.5% due to weakness in financial, cyclical and consumer stocks.

Ironically (because it's no longer a market beacon), Amazon.com (AMZN Quote - Cramer on AMZN - Stock Picks) demonstrated leadership of the market's newfound attitude. The online merchant rose 9.6% Tuesday despite forecasting fourth-quarter sales at the low end of expectations and gross margins below estimates. Amazon.com also overcame a slew of analyst downgrades.

The market's ability to rise in the face of "bad" news was most starkly evident Wednesday, as major averages rallied despite cautious comments from Cisco (CSCO Quote - Cramer on CSCO - Stock Picks).

Cisco tumbled 8% but the Comp rallied 3.4% behind strength in resurgent growth names such as Sycamore Networks (SCMR Quote - Cramer on SCMR - Stock Picks) and Level 3 Communications (LVLT Quote - Cramer on LVLT - Stock Picks).

Additionally, money kept flowing back into beaten-down bellwethers such as AT&T (T Quote - Cramer on T - Stock Picks), WorldCom (WCOM Quote - Cramer on WCOM - Stock Picks) and Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks). Gains by the market-cap giants, along with renewed strength in financials, helped the Dow rise 0.3% and the S&P 500 gain 1%.

The sustainability of Wednesday's advance was immediately challenged when Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) forecast earnings and revenue for 2001 far below expectations.

But as with Nokia and Cisco, Yahoo!'s woes proved unable to halt the upward momentum. Thursday proved to be the week's best session for the bulls, with the Nasdaq and Nasdaq 100 rising 4.6% each, the S&P 500 up 1% and the Dow marginally higher.

Following the example of Amazon.com (among others), a slew of chip and equipment stocks rallied sharply Thursday despite estimate cuts by several analysts. The Philadelphia Stock Exchange Semiconductor Index jumped 5.8%.

Throughout the week, investors seemed eager to do the opposite of Wall Street's recommendations.

Let's Play Catch... 22

Friday's modest decline ended the Nasdaq's three-session win streak -- its first since early September -- but that didn't generate much concern. On the other hand, reports that retail sales and producer prices were both stronger than economists expected, did. To some observers, the indicators suggest the Fed may ease by "only" 25 basis points at its Jan. 30-31 meeting, rather than the 50 basis points many market participants are projecting. Bond prices fell Friday in anticipation.

Friday's developments left investors with the dilemma of wondering whether they'd prefer more market gains or more Fed ease. Or if the former is possible without the latter.

"If the Nasdaq continues to run in the face of adversity, it could possibly negate the rationale for an interest-rate cut at the end of January or [intermeeting] in February," said Ned Riley, chief investment strategist at State Street Global Advisors in Boston. "I frankly believe the Nasdaq is the most important economic indicator and the Fed is gearing policy as much to its fluctuations as any other indicator." Because investors are so heavily weighted in tech, feelings of wealth or lack thereof track the index, he explained, noting a "strong correlation" in recent years between the Nasdaq and retail sales.

There was far less chatter about another intermeeting rate cut today than just a week ago, Riley observed, and less discussion of a 50 basis-point cut at the FOMC's meeting vs. earlier in the week. Additionally, financial stocks ended their helter-skelter week on a sour note while defensive groups such as utilities and pharmaceuticals returned to favor. (That financial markets are closed Monday in observance of Martin Luther King Day also contributed.)

Acknowledging the dangers of pegging monetary policy to stocks, the Fed is "ahead of the curve and trying to stem the tide before it becomes too damaging," Riley said. "The risk is the economy goes into free fall, which is what the Fed is trying to avoid."

He predicted the Fed will ease by 25 basis points at its Jan. 30-31 meeting -- but not by more and not prior. Market averages have bottomed, but you "need a reintroduction of some fear and a retracement of the Nasdaq's [recent] performance to get confidence the Fed is going to come back" and ease aggressively again, he added. (Paradoxical, isn't it?)

Riley noted Greenspan is "not encouraging speculative fever" and believes investors have learned that "valuation has a place, tech is cyclical and there's a price to pay for absurdity."

Huge percentage gains by many former momentum favorites this week, including Avici Systems (AVCI Quote - Cramer on AVCI - Stock Picks), MicroStrategy (MSTR Quote - Cramer on MSTR - Stock Picks), and BroadVision (BVSN Quote - Cramer on BVSN - Stock Picks), indicate those lessons may not have been totally absorbed.

But for the most part, investors kept their emotions in check and avoided the temptation to either panic or rejoice this week.