Another Big Day for Small-Cap Stocks

Wall Street is again faced with the question of whether "the market" means the majority of stocks or major proxies. While the latter were mixed with a modestly negative bias (although improving as lunchtime beckoned), the former continued to rise.

Like

Mighty Mouse

finding his voice after a bout with laryngitis, the

Russell 2000

continues to roar. The small-cap proxy was up 3.62 to 421.39, reflecting continued improvements in market internals.

In

New York Stock Exchange

trading, advancers were leading declining stocks 1,918 to 982 on 544 million shares. In

Nasdaq Stock Market

activity, gainers led 2,034 to 1,684 on 553.6 million shares.

The

Dow Jones Industrial Average

was lately up 14.60 to 10,477.32, having just recently poked its head into positive turf after spending all morning in the red. But the

S&P 500

was lower by 0.31 to 1322.55 and the

Nasdaq Composite Index

had declined 6.38 to 2515.39.

The Dow was restrained by

American Express

(AXP) - Get Report

,

Wal-Mart

(WMT) - Get Report

and

IBM

(IBM) - Get Report

. The Dow's best performer (by far) was

Eastman Kodak

(EK)

, up 9.3% after posting better-than-expected earnings.

Morgan Stanley Dean Witter

raised its recommendation to outperform from neutral.

The tech-leaning Nasdaq was most heavily damaged by

Sun Microsystems

(SUNW) - Get Report

, lately down 7.5%.

Last night, the firm posted strong earnings but issued some cautious comments about revenue growth prospects.

Merrill Lynch

cut its intermediate-term recommendation to accumulate from buy.

Other tech bellwethers were largely following the Sun, but improving as the morning waned; the

Nasdaq 100

was down 0.6% and the

Philadelphia Stock Exchange Semiconductor Index

was off 0.4%.

Internet proxies were faring better, but with a mixed bias.

TheStreet.com Internet Sector

index was up 9.42, or 1.4%, to 681.14, thanks largely to

Amazon.com

(AMZN) - Get Report

, lately up 12.7%.

Donaldson Lufkin & Jenrette

upgraded Amazon to a top pick from buy and raised its six-to-12-month price target to 280 from 190. Meanwhile,

TheStreet.com E-Commerce Index

was off 0.62 to 133.02.

Elsewhere, the

Dow Jones Transportation Average

was back on the upswing, lately up 81.09, or 2.4%, to 3534.66.

Cyclical Mania

Despite cooling a bit from their recently torrid pace, cyclical stocks were again strong performers. The

Morgan Stanley Cyclical Index

was up 1%.

The Internet-like gains of previously catatonic heavy-industry plays such as

Caterpillar

(CAT) - Get Report

,

International Paper

(IP) - Get Report

and

Alcoa

(AA) - Get Report

-- each up more than 30% since March 31 heading into today's action vs. 3% for the S&P 500 -- have sparked a wide debate on Wall Street.

Some market watchers have been downright

dismissive of the group's performance (and thus

Wrong! so far), describing it as simply a short-term spike after years (literally) of underperformance. Additionally, the cyclicals may be doing well simply because they're producing better earnings compared with last year's disaster. Meanwhile, many NYSE traders are thrilled to finally have some "action" in these names.

But some players are far less sanguine: Historically speaking, cyclical stocks rise at the end of bull markets. Their performance is often a harbinger of increased economic activity, which, in turn, brings about higher interest rates. And we know how the stock market hates higher interest rates (don't we?).

"There is a relationship between long-term movements in cyclical stocks and the economy," said Jim Bianco, president of

Bianco Research

. "The way bonds are behaving, it gives pause it might be something real."

Indeed, after rallying sharply from

Good Friday through April 8, the long bond's price has since reversed course and was falling again today. The price of the 30-year Treasury bond was lately down 15/32 to 95 16/32, its yield -- which moves in the opposite direction of its price -- rising to 5.56%.

Along with improving cyclicals, the bond market's performance is just one other factor (or a reflection thereof) that has market players concerned about (drum roll, please) the re-emergence of inflation. Commodity prices -- especially oil -- have risen noticeably this year (albeit from the depths); there are signs emerging markets in Asia, as well as Japan, have bottomed; and the

European Central Bank's

rate cut last week is expected to spur growth on the Continent. Meanwhile, the U.S. economy continues to hum along.

"The way bull markets end is interest rates go up, and the reason interest rates go up is because the economy is overheating and

Fed

slams on the breaks," Bianco continued. "With that said, whether or not the move at this point into cyclicals is portending that, or just part of rapid-fire rotation, is still an open question. I believe that relationship -- if cyclicals take off it's a powerful sign the economy is going to heat up -- but I'm also so leery of the way this market trades. Cyclicals could have a great week and a half and then they'll puke 'em up after that. I don't have a good feel if this is a new cycle or just the latest rotation."

Some with perhaps a better feel for commodities (whose price movements directly influence the performance of cyclical stocks) also say it may be premature to run out and buy those inflation-index bonds.

"Many economies have done generally better, but it hasn't fueled heightened concerns about inflation," said David Rinehimer, director of futures research at

Salomon Smith Barney

. "You could have less likelihood of an ease, but I don't think it's triggering any inflation fears. That's what you'd have to have, a revival of inflationary concerns to trigger a sharp break in the stock market that might bring some money into hard assets."

Rinehimer, who's admittedly not a commentator on equities, observed many cyclical plays are "viewed as relatively cheap." With commodity prices "nearing a bottom" and economic growth increasing, "they could benefit from a recovery," he said.

So it appears few on Wall Street are pushing the "inflation-is-back" panic button just yet. But if the stock market is indeed a forecaster of future events, the ongoing cyclical-stock revival demands investors' attention.

Friday's Midday Movers

By Heather Moore
Staff Reporter

Dow component Eastman Kodak was clicking up 6 3/16, or 9.3%, to 72 3/4 after recording first-quarter earnings of 80 cents a share, topping the 11-analyst estimate of 76 cents and moving ahead of the year-ago 73 cents. Kodak said quarterly sales came in at $3.1 billion, up 6% from the year-ago period. Morgan Stanley Dean Witter upgraded the stock to outperform from neutral.

Another of the gilded 30, Caterpillar, was up 2 1/8 to 63 7/8 after posting first-quarter earnings of 57 cents a share, higher than the 18-analyst outlook for 42 cents but behind the year-ago $1.15.

In other news:

Amazon.com was up 21 1/4, or 12.7%, to 189 3/8 after Donaldson Lufkin & Jenrette upgraded the stock to top pick from buy and upped its six-to-12-month price target on the stock to 280 from 190.

CyberShop International

(CYSP)

was up 1 1/16, or 8.8%, to 13 1/4 after setting a marketing pact with

Inktomi

(INKT)

to incorporate its products into Inktomi's shopping engine. Inktomi was up 16 3/8, or 13.8%, to 135 5/8.

TheStreet.com

wrote about Inktomi's earnings report in a story

last night.

Preview Travel

(PTVL)

was up 2 11/16, or 13.1%, to 23 1/4 after

Business Week's

Inside Wall Street column quoted an analyst at

Pacific Crest Securities

saying he believes that the company's leading position as a provider of travel services online makes it a "prime acquisition target for an e-commerce" company. And

StarTek

(SRT) - Get Report

was up 5 3/16, or 46.2%, to 16 11/16 after the column called the stock an undervalued Internet play.

Earnings/revenue movers

Boise Cascade

(BCC) - Get Report

was up 1 7/16 to 38 3/8 after reporting first-quarter earnings of 26 cents a share, beating both the 13-analyst estimate of 11 cents and the year-ago loss of 10 cents.

Dominion Resources

(D) - Get Report

was down 1/16 to 37 7/8 after reporting first-quarter earnings of 72 cents a share, 2 cents above the 14-analyst estimate and ahead of the year-ago 62 cents.

Parker Hannifin

(PH) - Get Report

was up 1 1/8 to 45 15/16 after posting third-quarter earnings of 70 cents a share, above the 16-analyst estimate of 66 cents but down from the year-ago 75 cents.

Sepracor

(SEPR)

was up 7/16 to 94 after reporting a first-quarter loss of 93 cents a share, narrower than the seven-analyst prediction for a loss of $1.13 but wider than the year-ago loss of 43 cents.

Sun Microsystems was off 4 9/16, or 7.5%, to 56 after last night posting third-quarter earnings of 71 cents a share, a penny ahead of the 21-analyst estimate. Today, Merrill Lynch downgraded Sun to near-term accumulate from buy, while maintaining a long-term buy, due to valuation.