Update from 4:16 p.m. EST

The

Dow Jones Industrial Average

has risen from the dead, closing above 11,000 for the first time since June 2001.

Monday's advance above the psychologically important 11,000 level has the potential to create some buzz and excitement, a nice change as the blue-chip index had fallen out of favors over the past several years. The Dow even fell 0.6% in 2005, its first annual loss since 2002. The Dow's last attempt to breach the key level, in March 2005, quickly fizzled away.

But on Monday, at least, the Dow managed to hold onto its gains and closed at 11,009.26, adding 49.95 points, or 0.5% on the day. It earlier touched an intraday high of 11,020.

The

S&P 500

rose 0.35% to 1289, and the

Nasdaq Composite

gained 0.6% to 2318.

"It will be important psychologically to show that the Dow can stay above 11,000 this time around," says Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank.

But in a market that's hungrier for real catalysts than for symbolism, fourth-quarter earnings will take precedence in the weeks to come, according to Michael Malone, trading analyst at SG Cowen.

In a cautionary portent,

Alcoa

(AA) - Get Report

kicked off the season with disappointing results after the close. Alcoa was down 3.8% in after-hours trading, after closing with a daily gain of 1.2%. The shortfall was apparently linked to production disruptions after Hurricane Katrina.

The Dow has long been shunned by institutions and funds alike, which prefer to benchmark their portfolios and performance with broader indices such as the S&P 500. Thoe indices are less susceptible to the individual stories and performance of the Dow's 30 component stocks.

But the Dow has remained a favorite indicator for the broader investing public. "Dow 11,000" will be on newspaper headlines on Tuesday. The subject can launch a conversation, at least at some cocktail parties, and it may therefore generate broader interest from retail investors.

To attempt to predict whether the blue-chip index is poised to hold onto its gains this year, it helps to see why it has underperformed in recent years, especially in 2005.

As a large-cap index, the Dow has come to symbolize sleepy, big corporate America during the tepid economic recovery that began in 2003. Its advance was also capped, many believe, as the

Federal Reserve

began raising rates in 2004. Also, price-to-earnings multiples for mega-cap stocks have been compressed by expectations that continued rate hikes would dampen growth and profits in the future, according to Fitzpatrick.

With the Fed hinting last week that the number of further rate hikes may "not be large," many now believe that multiples can expand as stock prices advance. "We're entering a new trend this year and that bodes well for the Dow," says Fitzpatrick.

On that note, two Fed officials, Kansas City Fed President Thomas Hoenig and Atlanta Fed President Jack Guynn (who votes on rates this year) sounded fairly dovish in speeches Monday. Guynn said he is "personally very comfortable" with market expectations about future fed rate moves. The market currently expects two more rate hikes at most. Hoenig brought more nuance, noting that it will all depend on economic data.

While the market may benefit from the end of rate hikes, the Dow is on the whole more influenced by cyclical economic trends than its peers, or at least by the outlook for the economy. So it remains to be seen what the impact of a slowing housing market will be on consumption and the economy before dreaming of Dow 12,000.

As a consumer staple, Dow component

Procter and Gamble

(PG) - Get Report

, it seems, is shielded from the ups and downs of the economy, but it's unclear if consumers would still splurge on items such as Gillette's Mach-3 razor blades in an economic downturn.

Last year, the index also fell on the wrong side of soaring energy prices. On the one hand, the mega-cap

Exxon Mobil

(XOM) - Get Report

, the Dow's only energy component, rose 12% in 2005. But that paled in comparison with smaller-caps such as

Valero Energy's

(VLO) - Get Report

132% advance last year.

On the other hand, several Dow components, such as

Dupont

(DD) - Get Report

,

Caterpillar

(CAT) - Get Report

and Alcoa, felt the pinch of rising input or production costs, including energy.

Not to mention the most spectacular slump of them all: the 48% slide in

General Motors

(GM) - Get Report

, which was hit partly by the double blow of soaring gasoline prices and rising interest rates.

But it would seem that investors and Wall Street analysts now see light at the end of the tunnel, especially as most bet the Fed will soon step aside, and with energy prices stabilizing. GM rose 5.5% last week and soared another 7.7% on Monday, following a broker upgrade and the buzz surrounding the Detroit auto show. GM CEO Rick Wagoner also used the show to signal more cost-cutting measures.

As for Alcoa, latest earnings shortfall notwithstanding, Morningstar analyst Scott Burns believes the company should do well throughout at least the first half of 2006, given that aluminum prices have soared and the firm has been able to pass on higher input costs, namely electricity, to its customers. The firm also has suffered from the slump in the auto industry. Still, Burns doesn't expect much further advance in Alcoa's stock price, unless energy prices drop while aluminum prices stay firm. Ironically, one of the biggest uses of Alcoa's demand is in powerlines.

The Dow's inclusion of more technology stocks in 1999 came at the tail end of the bursting of the tech bubble. Similarly to energy shares, large-cap Dow components such as

Microsoft

(MSFT) - Get Report

,

IBM

(IBM) - Get Report

and

Intel

(INTC) - Get Report

have failed to capture the excitement generated by the likes of

Google

(GOOG) - Get Report

or

Apple

(AAPL) - Get Report

.

"Intel is the closest thing to sexy on the Dow," says Jim Awad, president of Awad Asset Management. The stock gained roughly 9% in 2005.

Similarly, dividends have been steady in Dow components, but more rewarding at faster-growing companies.

But with the economy expected to slow this year, many strategists are again calling for the return of large caps as a defensive play. Big Pharma, such as

Pfizer

(PFE) - Get Report

and

Johnson & Johnson

(JNJ) - Get Report

, would stand to gain.

Taking a contrarian stance, Awad still bets on small-caps, as he expects the economy to be boosted by an increase in capital spending from firms in 2006.

But the Dow, he says, also will rise, "simply because a rising tide lifts all boats" -- even the battleships.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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