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Deal-Led Dow Ups Ante

Alcoa's M&A gambit extends the index's record; some strategists lift their '07 targets.

Last week's $16.8 billion in deals were still fresh in traders' minds when aluminum producer


(AA) - Get Alcoa Corp. Report

announced its $27 billion bid for


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The merger news sustained an ebullient mood on Wall Street amid the rising pitch of bullishness among Wall Street strategists.

Alcoa added 8.1%, helping drive the

Dow Jones Industrial Average

to another record high. The Dow ended the day up 0.4% to close at 13.312.97, marking the 24th trading day out of 27 that it's ended with a positive move, the longest such streak since 1927.


S&P 500

continued its march toward a new high, gaining 0.3% to close at 1509.48. The

Nasdaq Composite

lagged, slipping just 0.05% to close at 2570.95.

In addition to Alcoa, the Dow was led by


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, while the S&P 500 got an additional boost from


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. Weakness in big-cap Internet stocks, including recent one-day wonders




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, held back the Comp.

While it seems the market rhetoric has gone over the top, including news of a remake of the 1987 movie

Wall Street

, traders and strategists just can't find good reasons to ratchet down expectations for U.S. stocks this year. Indeed, some of them have increased their price targets for the S&P 500.

Citing increased expectations for earnings growth this year, Goldman Sachs' strategists Abby Joseph Cohen and Michael Moran on Monday increased their year-end target for the S&P 500 to 1600 from 1550. The change means another 6% climb from current levels and a 13% rise for the year. The team increased its target for the Dow to 14,000 from 13,500.

Elsewhere, Prudential Securities' strategist Ed Keon upped his Street-high year-end target for the S&P 500 to 1650 from 1630.

The moves from the Goldman and Pru strategists echo Bank of America's U.S. equities strategist Thomas McManus, who recently increased his S&P 500 forecast to 1550 from 1465, adding himself to the cadre of analysts that believe the S&P 500's 1527 record will be surpassed this year. McManus notes that earnings should benefit from the declining dollar, still-high commodities prices, and increasing pricing power in some industries.

Where the demand for U.S. stocks is coming from remains somewhat a mystery as U.S. retail investors continue to put their money in overseas assets. The government's next read on foreign investment in U.S. equities comes next week. In the meantime, the supply of stocks and valuation arguments amid the global liquidity party remain the best explanations of the stock market's recent gains.

Charles Biderman, president of Trim Tabs, notes the supply of stock is shrinking at a record-setting pace. According to his calculations of stock-buybacks, new cash takeovers, fund flows and new stock offerings, the market cap of the U.S. stock market is set to shrink by 4.3% by the end of the year.

Through April, the pace of the market's shrinking is more than double that of 2006. On average, the market shrinks by $5.7 billion daily, Biderman notes, three times the levels in each year of the last strong bull market from 1995 to 1999.

"Stocks are arguably still roughly 20% undervalued," writes Tobias Levkovich, Citigroup's chief equity strategist. His valuation method compares trailing price-to-earnings ratios of the S&P 500 with Treasury bond yields and his calculations of equity risk premiums.

A valuation discrepancy of this magnitude has occurred only 16% of the time over the past 45 years, he writes, adding that means odds are 100% in the market's favor. He writes that the market has been up 12 months later in every instance.

Levkovich's target for the S&P 500 by year-end is 1600, and 14,000 for the Dow.

So while the market enjoys the liquidity bash, partygoers always know there's a central bank meeting somewhere on the horizon that could ruin things. How about three?

The combination of Wednesday's

Federal Reserve Open Market Committee

meeting, and European Central Bank and Bank of England meetings on Thursday stand to threaten more tightening.

Only the Bank of England is expected to hike its borrowing rate to 5.5%, but the ECB is expected to be hawkish about a possible upcoming rate hike. The FOMC is expected to retain its light tightening bias despite a couple of recently benign inflation readings.

All that adds up to potentially more downside for the U.S. dollar, which (

guess what?

) is bullish for large cap multinational stocks. And, around we go.

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


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