What a Week: Here Comes the Sun (Little Darlings)

With apologies to the Beatles: All but the most hardened skeptics have to admit "it's getting better, a little better all the time."

In fact, the economic data got a lot better this week, and stocks and bonds reacted accordingly. Notably, some of the market's recent whipping boys (and girls) were among the week's best performers, evincing the forgiving tone of the action.

For the week, the Dow Jones Industrial Average rose 2%, while the S&P 500 gained 2.9% and the Nasdaq Composite leapt 7%. The yield on the benchmark 10-year Treasury, which moves inversely to its price, rose 34 basis points, ending the week at 5.32%.

The catalyst for those moves was another batch of better-than-expected economic data, capped by Friday's employment report, which showed 66,000 nonfarm payrolls were added in February. Meanwhile, the unemployment rate dropped to 5.5% from 5.6%. A downward revision to January's payrolls was a mitigating factor, but February's report still bested the consensus forecast for flat job growth and a jobless rate rise of 5.8%.

Earlier in the week, bulls celebrated robust reports, such as the Institute for Supply Management's nonmanufacturing survey, factory orders, the Fed's beige book, Challenger Gray & Christmas' layoff readings, and productivity. The tone of those reports was seconded by Federal Reserve Chairman Alan Greenspan's more upbeat address in the second part of his semiannual testimony to Congress on Thursday.

Greenspan's use of the term "expansion" to describe the economy vs. "recovery" in part one of his testimony on Feb. 27, suggested the recession is over. Immediately thereafter, the debate switched to when the Fed will begin to raise interest rates -- about which various theories abound, as reported Thursday evening.

But "we encourage all market participants to remember who's in charge here," commented James Padinha, economic strategist at Arnhold & S. Bleichroeder. "At the end of the day, the Fed's opinion is the only opinion that counts. To let your thinking about what the Fed should do have an impact on your assessment of what the Fed will do is not the way to play this game." (Italics his.)

Padinha, long ago TheStreet.com's economics correspondent, nevertheless offered his opinion: Specifically, that the Fed is already "well behind the [inflation] curve" and the fed funds rate should be at least 2.75% vs. 1.75% currently. (Italics mine.)

By Friday, fed fund futures, which some say is the best predictor of monetary policy, were pricing in more than 70% odds of a rate hike at the Fed's May 7 meeting vs. less than 40% earlier in the week.

Concerns about future rate hikes were prime contributors to the Treasury market's steep losses this week. But neither those worries nor pronounced weakness in the dollar vs. the yen, which abated on Friday, was enough to derail the stock market.

All is Forgiven

The week's micro (company-specific) news was less uniformly positive than the macroeconomic news. Some of the notable stories were unambiguously negative, including Oracle (ORCL Quote), which tumbled 14% Monday after a profit warning late last Friday; McData , which lost nearly 27% Wednesday after its own profit warning; and Sepracor (SEPR Quote), which tumbled 59% Thursday after the Food and Drug Administration said it plans to reject the firm's allergy drug Soltara.

Thursday evening's much-anticipated updates from Sun Microsystems (SUNW Quote) and Intel (INTC Quote) could be described as mildly upbeat at best.

Yet, both Sun and Intel were solidly higher Friday, fitting for a week in which many individual names previously bedraggled by various woes showed notable strength, including Calpine (CPN Quote) and Tyco (TYC Quote).

Elsewhere, telecom hound dogs Qwest (Q Quote) and Sprint (FON Quote) successfully floated bond offerings of $1.5 billion and $5 billion, respectively.

The offerings were priced aggressively (high yields, that is) and came just days after rating downgrades by Moody's. But the size of each was significantly higher than originally planned -- $1 billion and $2 billion, respectively -- an indication of the market's magnanimous mood, a sharp reversal from its tone just a few weeks ago.

"If you told me that Sprint could do a $5 billion deal and Qwest a $1.5 billon deal two weeks ago, I would have busted a gut," quipped one corporate bond trader.

Of late, few groups have been as downtrodden as tech. Yet, the Nasdaq outperformed the Dow and S&P for a second straight week. The Comp's recent relative strength was most evident Friday when it rose 2.6% vs. 0.5% for the Dow and 0.6% for the S&P.

On Feb. 27, I discussed the potential for the Comp to begin outpacing the Dow, and revisited the notion the following day. But the many skeptics said price-to-earnings ratios were too high and the CBOE's Volatility Index too low for a rally to ensue, especially one led by tech.

The VIX has acted well as a contrarian indicator in the past but "took its faithful over the cliff this time and likely created, and is still creating, a healthy skepticism during the unfolding of this vertical advance," Michael Paulenoff, founder of 2MStrategies.com, said Friday.

Indeed, many continue to view the rally with skepticism because of the still-subdued levels of the VIX and its Nasdaq counterpart, the VXN.

"That is why we can't put too much weighting on any one indicator at any particular time," Paulenoff said. "The more folks watch and trust it, the more likely it will elicit a false signal."

Looking ahead, the Comp's eclipse of its 200-day moving average of 1905 on Friday is likely to entice some previously skeptical participants. But rather than going down the forecasting road now, let's instead reflect on what an impressive week this has been and focus on the coming weekend.

Still, don't forget to check Monday's Midday Musing for details on where Paulenoff, among those who called the Comp's recent rally, believes the index is heading next.

Consider yourself teased.