Dow's Rally Resumes

Positive economic figures inspire investors after a failed rally attempt Monday on Saddam's capture.
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Updated from 4:03 p.m.

Stocks finished higher Tuesday, with the

Dow

and

S&P 500

hitting new 18-month highs, on the back of a slew of positive economic reports, even as the dollar touched yet another record low against the euro.

The Dow gained 106.74 points, or 1.1%, to 10,129.56. The blue-chip index has remained above 10,000 since it regained the milestone last Thursday. The S&P 500 improved 7.09 points, or 0.7%, to 1075.13 and the

Nasdaq Composite

rose 6.03 points, or 0.3%, to 1924.29 after a broad-based late rally.

Volume on the New York Stock Exchange was 1.51 billion shares, while 1.80 billion shares changed hands on the Nasdaq. Advancers beat decliners by about 3 to 2 on the NYSE and were close to even on the Nasdaq.

The late push was "not really a delayed reaction to the morning's economic reports, it would be unusual for there to be such a long time lag" said Tom Schrader, a trader at Legg Mason. "It looks like the buy side is setting up their books for the

options expiration later in the week and from a technical standpoint, the S&P got a boost after it broke through 1071."

"The economy is certainly pointing in the right direction for growth to stay above 4% through next year, but the market has been discounting this for some time," said Peter Cardillo, chief strategist at Global Partners Securities. "The next

equity catalyst is going to be earnings as we approach year-end, beginning with preannouncements and then when earnings season really begins in January."

Economic News

There were a number of economic surprises today. The consumer price index dipped 0.2%, its first monthly decline since April. Economists expected a rise of 0.1%, after an unchanged reading in October. Core CPI declined 0.1% after rising 0.2% in the previous month; the market had expected a 0.1% increase. The

Federal Reserve

recently surprised the market when it said the risk of inflation was equal to that of disinflation in its December policy statement.

"Given that inflation is already running below the presumed target, the Fed is unlikely to begin to raise rates until the core CPI shows signs of having bottomed," said David Greenlaw, U.S. economist at Morgan Stanley, in a note to clients. "We expect to see evidence of at least a slight turnaround in core inflation pressures by mid-2004 and thus continue to expect the first tightening sometime around September."

Housing starts rose unexpectedly by 4.5% in November to 2.07 million units, the highest level in about 20 years. Meanwhile, building permits fell more than expected to 1.87 million units. Strong housing and construction markets continue to support the recent economic upswing.

The current account deficit narrowed to $135.0 billion in the third quarter, from $139.4 billion in the previous one; economists had expected a smaller decline. Along with the budget deficit and low Treasury yields, the ever-expanding current account deficit has put significant pressure on the dollar of late.

Industrial production grew by 0.9% in November, posting its largest increase since October 1999. Economists had expected a smaller improvement to 0.5% from 0.4% in October.

Finally, capacity utilization increased to 75.7% in November, from 75.1% in the previous month, marking its best showing in about a year. The market had expected a smaller improvement. Excess capacity has been a key factor helping to keep inflation under control and the Federal Reserve on hold.

Nasdaq Blues

Since setting an 18-month closing high of 1989.82 and briefly trading above the key 2000 level, the Nasdaq has seriously lagged the other major averages. Over this time, the Nasdaq has lost about 3.3% of its value, while the Dow has advanced about 2.3% and the S&P 500 is virtually flat. In addition, today is the second consecutive day the Nasdaq has been outpaced by both the Dow and S&P 500.

"The Dow has outperformed the Nasdaq recently, as investors move from smaller capitalization technology stocks and into larger-caps," said Cardillo. "This should continue over the next quarter as companies like

General Electric

(GE) - Get Report

,

General Motors

(GM) - Get Report

,

IBM

(IBM) - Get Report

and

Microsoft

(MSFT) - Get Report

emerge as the new market leadership."

"I am not saying that small-cap techs will not do well, but the emphasis is likely to shift," added Cardillo.

Barry Berman, head Nasdaq trader at Robert W. Baird, disagrees. He thinks the Nasdaq is experiencing a modest pullback after a year of enormous gains and doesn't see evidence of a sector rotation out of Nasdaq stocks.

"The Nasdaq had the biggest run-up

over the year and got a good deal ahead of itself relative to other averages," said Berman. "We are seeing less than a 5% correction, which is not dramatic."

Other Markets

Markets overseas finished lower. London's FTSE 100 lost 0.3% to 4333, while Germany's Xetra DAX dipped 0.2% to 3866. In Japan, the Nikkei closed down 2.1% at 10,272 and Hong Kong's Hang Seng fell 2.1% to 12,260.

The dollar fell to $1.2324 per euro and was slightly weaker against the Japanese yen. The U.S. current account deficit narrowed slightly in the third quarter, but it was still the third largest on record.

The 10-year Treasury note gained 8/32, its yield rising to 4.22%, following the very benign inflation report.

Movers

In corporate news,

Honeywell

(HON) - Get Report

offered in-line guidance for its fourth-quarter results, saying it expects a profit of 47 cents a share. Meanwhile, its full-year 2004 guidance of $1.40 a share to $1.55 a share missed analysts' consensus estimate of $1.59 a share. Honeywell shares slumped 42 cents, or 3.3%, to $30.41.

Pier 1 Imports

(PIR) - Get Report

reported a third-quarter profit of 35 cents a share, which matched analysts' estimates. Revenue increased 10%. The company issued fourth-quarter guidance of 52 cents to 58 cents a share, compared with analysts' estimate for 64 cents a share. Pier 1 shares dropped $1.79, or 8%, to $20.72.

Shares of

Oracle

(ORCL) - Get Report

gained 42 cents, or 3.3%, to $13.12. After the close Monday, the company reported second-quarter earnings of 12 cents a share on an 8.2% rise in sales. Results beat analysts' expectations for a profit of 11 cents a share.

And

Motorola

(MOT)

said former

Sun Microsystems

(SUNW) - Get Report

president and COO Ed Zander will be its new chief executive on Jan. 5. Motorola shares improved 53 cents, or 4.1%, to $13.32.

UBS downgraded

Sears

(S) - Get Report

to neutral from buy and lowered its price target to $50 from $61, based on weak sales. Shares of Sears slipped 91 cents, or 2%, to $43.59.

Shares of

Webzen

(WZEN)

, a developer and distributor of online games in Korea, dropped $1.17, or 10.5%, to $10.00, on its initial day of trading as an ADR.

The earnings calendar picks up Wednesday. Financial leaders

Lehman Brothers

(LEH)

and

Bear Stearns

(BSC)

are both scheduled to report. In addition, consumer electronics giants

Best Buy

(BBY) - Get Report

and

Circuit City

(CC) - Get Report

will help close out the third-quarter reporting season.

However, investors are already looking ahead to next quarter's earnings season, which begins in January.

There are no major economic releases on tomorrow's calendar.