TEL AVIV -- Just days into the cease-fire between Israel and Hezbollah, the Israeli market seems determined to pickup right where it left off before the war. A host of positive bank earnings supported war-resistant bulls, as Tel Aviv's main indices climbed to pre-conflict levels.

Shares of

Bank Hapoalim

, Israel's largest bank, closed 3.2% higher on Thursday after it reported second-quarter net income of roughly $150 million, reflecting a 16% return on equity. The bank's shares completed a 6% jump since the cease-fire took effect on Monday.

The TA-25 index completed a 5.4% weekly climb, closing just above its July 11 level -- the day before Hezbollah attacked Israel's northern border and kidnapped two Israeli soldiers. The Israeli banks index added 4% on Thursday, completing a 10.5% weekly surge, reflecting heavy buying on the part of foreign institutional investors. (Israeli markets are closed Fridays and Saturdays.)

With this much market resilience in face of extreme geopolitical conditions, market bears had few moments of grace during a month of uncertainty. The Kessem Short 25 ETF, which bets on the downward movement of the TA-25 index, fell 12.3% since July 12, after briefly rallying 15% on that day.

"The general mood in Israel right now is business as usual," said Yaron Bloch, head of UBS Securities Israel. "First of all, Israel couldn't have gone into this conflict in a better condition, which means that the chances it will enter a recession are very little. Secondly, most of the foreigners investing in this economy are well-accustomed to the ever-changing reality in Israel and don't panic."

Interestingly, Israel's media has been focusing on a host of corruption and harassment scandals engulfing some of Israel's top leaders, including Israel's Chief of Staff's controversial sale of his investment portfolio three hours after Hezbollah's first attack and an ongoing examination of an alleged bribery incident connected to Prime Minister Olmert.

On the corporate fraud front, the options backdating fiasco surrounding several U.S.-traded Israeli companies climaxed with Kobi Alexander,

Comverse Technology

( CMVT) former CEO and a central figure in Israel's technology industry, being announced fugitive by the U.S. Federal authorities and Interpol.

From the financial markets' perspective, the shift of attention from war to more domestic problems was welcomed. Despite general criticism of Olmert's handling of the war, the market rallied as Lebanese troops headed south and as Israel pulled out.

Bloch explains that "regardless if Israel managed to defeat Hezbollah or not, the market loves a cease-fire." Although Hezbollah remains largely armed and in power, Bloch believes the market isn't counting on another conflict breakout. "It seems that neither of the sides have any interest in restarting fighting at this point," he says.

But analysts continue recommending a stock-picking approach rather than assuming a broad exposure to the market, since the full economic effects of the war are still unknown. Estimates from various economists and the Bank of Israel say that one month of fighting is likely to shave off 1% of the country's annual GDP growth, which was previously expected to land over 4%.

Prior to the war in Lebanon, Israel's GDP grew by 5.9% in the first half of 2006.

Local Favorites

Joseph Wolf, director of research at UBS Securities, spoke to

about his favorite stocks under the current environment.

"July was definitely a weak month in terms of economic activity, which will probably appear in third-quarter corporate earnings as a one-time loss, but we won't see a huge number of bankruptcies or a real bad recession since the economy was in a good condition going into the war," Wolf said. "But sentiment is somewhat of a problem. Whether or not tourism will jumpstart again is an important issue -- very much depends on the Israeli September-October holiday season."

Wolf recommends buying shares of Bank Hapoalim as a direct play on Israel's economy. Hapoalim has been trading at 1.2 times its book value, relatively cheap compared to higher bank multiples of 1.3 to 1.5 times during 2005, he says.

Wolf also recommends

Delek Group

a diversified holdings group with a strong energy arm,

Delek US

(DK) - Get Report


"Delek Group is a broad mix of exposure -- 50% Israeli and 50% abroad, which serves as a certain hedge on Israel, he says. "The company historically distributes 50% of its income through dividends and is trading at a 50% discount to its net asset value."

Shares of Delek Group rose 2.8% on Tel Aviv trading Thursday. Shares of Delek U.S., which acquired a refinery and pipelines in Texas as well as a gas stations and convenience stores, rose 3% to $19.90 Friday -- up 40% in the past two months.

Wolf also likes the defense-electronics company

Elbit Systems


, despite what he defines as its "liquidity issues." The company has underperformed at a time of a heightened security consciousness, but this is probably because the stock isn't liquid enough. This, however, may change positively, since a block trade of 7.7% of its shares, or 3.16 million shares, currently owned by

Koor Industries


is expected shortly to come to market in Tel Aviv.

Meanwhile, Middle Eastern hostilities haven't prevented a slew of takeovers in the Israeli technology spectrum.

Mercury Interactive

( MERQ) was acquired by


(HPQ) - Get Report

following its options backdating debacle, and


( FLSH) was saved by the bell by



acquisition after the chipmaker said it would restate five years of previous financial reports because of stock-options accounting.

In this respect, many believe Comverse Technology is the next in line for a takeover.

Lastly, analysts at Oscar Gruss estimated this week that

Ceragon Networks

(CRNT) - Get Report

, which provides wireless-broadband solutions for telecom carriers was "developing into a potential acquisition target."

The research firm citied


( MOT) as leading the pack of potential buyers for Ceragon.