Dow Industrials Top 18-Month High - TheStreet

Updated from 4:03 p.m. EST

Stocks closed solidly higher Monday, ahead of Tuesday's

Federal Reserve

meeting, with the

Dow Jones Industrial Average

close to the 10,000 level.

The Dow gained 102.59 points, or 1%, to 9965.27, topping its 18-month high set last Thursday. The Dow last touched 10,000 on May 31, 2002. The

S&P 500

rose 7.80 points, or 0.7%, to 1069.30, and the

Nasdaq Composite

gained 11.03 points, or 0.6%, to 1948.85, following upgrades of technology leaders

Microsoft

(MSFT) - Get Report

and

Cisco

(CSCO) - Get Report

.

Volume on the

New York Stock Exchange

was 1.19 billion shares, while 1.58 billion shares changed hands on the Nasdaq. Advancers beat decliners on the NYSE at about 2 to 1 and were close to even on the Nasdaq.

"The market's major uptrend continues to show strong technical credentials," said Richard McCabe, chief market analyst at Merrill Lynch. "But a near- and medium-term momentum indicator overbought condition could soon lead to another interim correction."

McCabe is nevertheless encouraged by the high put/call ratio and thinks "this favorable condition could provide a cushion for any near-term market decline."

Bond Market

The 10-year Treasury bond fell 10/32, its yield rising to 4.27%. Volumes were light as investors await Tuesday's decision by the Federal Open Market Committee, but supply pressures weighed on the Treasury market in anticipation of new government and corporate debt issues.

The bond and equity markets are focused on Tuesday's Federal Reserve FOMC meeting, when the central bank is widely expected to leave interest rates unchanged at 1%, but could alter the language in the press release to reflect improving economic conditions.

"Before the employment report, everyone seemed to expect a change in the Fed statement," said William Hornbarger, fixed income strategist at A.G. Edwards. "Currently, expectations are more mixed and that is reflected in federal funds rate futures, which has lowered the probability of Fed tightening."

"I expect the Fed to say that the economy is getting better and growth is improving, but they will keep the statement that says risks of further disinflation outweigh risks of inflation," said Hornbarger. He believes, however, that the bond market could be taken by surprise if the Fed is even more vocal about the economy's strength.

In particular, the bond markets are focused on the phrase, "policy accommodation can be maintained for a considerable period," and whether the Fed will make a subtle change in policy by removing "considerable period."

"The Street is saying that they will soften

this language," said Hornbarger.

Bill Dudley, U.S. economist at Goldman Sachs, believes the market is too preoccupied with this small aspect of the statement.

"Although Fed officials could decide to remove the 'considerable period' language from the FOMC statement, such a change would not signal any fundamental shift in the outlook," Dudley wrote in a research note. "Fed officials have repeatedly indicated a desire to be patient. If the 'considerable period' language were removed, then the FOMC would presumably substitute some other language to underscore this sentiment."

Other Markets

The dollar was weaker against the Japanese yen and the euro, extending its decline to a record low against the European currency. A euro currently costs $1.2218. The Fed's commitment to low rates has hurt the dollar, because low Treasury yields are less attractive than higher-yielding government bonds elsewhere.

Jes Black, currency analyst at MG Financial Group, believes that the dollar will fall further if the Fed does not remove "considerable period" from its statement Tuesday. But he added that "a move away from this exceptionally accommodative strategy could spark a brief rally."

Overseas markets finished lower, with London's FTSE 100 down 0.2% at 4360 and Germany's Xetra DAX down 0.9% at 3807. In Asia, Hong Kong's Hang Seng fell 1.1% at 12,177, and Japan's Nikkei closed 3.2% lower at 10,045.

Movers

In earnings news,

SanDisk

(SNDK)

reaffirmed full-year 2003 revenue of at least $1 billion. Consensus is for $1.04 billion. The company's shares rose $1.99, or 3.1%, to $66.34.

SoundView upgraded Microsoft to outperform from neutral with a $33 price target. Shares of the company rose 26 cents, or 1%, at $26.24.

Cisco was upgraded to buy from hold at Legg Mason, which has a $29 price target on the stock. The broker believes Cisco is trading at an attractive valuation and will benefit from improved economic conditions. The company's shares gained 54 cents, or 2.3%, to $24.29.

RBC Capital Markets downgraded shares of

PeopleSoft

(PSFT)

to underperform from sector perform and lowered the company's price target to $19 to $21 a share. The shares improved 4 cents, or 0.2%, to $21.41.

And

JetBlue Airways

(JBLU) - Get Report

was upgraded at Merrill Lynch to buy from neutral. Shares of JetBlue gained $1.94, or 7.5%, to $27.80.

Tuesday, attention will be firmly focused on the FOMC meeting. As discussed, the Fed is widely expected to leave interest rates unchanged at 1%, but could alter the language in the press release to reflect improving economic conditions.