On the literal eve of war, the world held its collective breath Wednesday. Wall Street was no exception, as major stocks proxies ended mixed. However, shares improved as the session waned in another sign of traders' eager anticipation of war.

The

Dow Jones Industrial Average

rose 0.9% to 8265.45 after trading as low as 8141.50 around 12 p.m. EST. The

S&P 500

gained 0.8% to 874.02 vs. its intraday low of 861.21, while the

Nasdaq Composite

dipped 0.2% to 1397.10 but off its nadir of 1378.60.

The Dow and S&P were aided by

Altria Group

(MO) - Get Report

following a Morgan Stanley upgrade and financial stocks, thanks to better-than-expected earnings from

Bear Stearns

(BSC)

.

That the Dow and S&P rose while the Comp fell only marginally after such big gains in the past week has to encourage the bulls, whose ranks rose to 46.6% from 39.8% in the Chartcraft.com's latest

Investors Intelligence

poll. Bearish sentiment fell to 35.2% from 37.5%.

The rising bullishness reflects both the recent rally and traders' expectations that it will continue when the war, which appeared imminent Wednesday, gets under way in earnest. Indeed, stocks seemingly bounced from their midday lows in conjunction with news reports of U.S. air strikes against Iraqi artillery positions near the Iraq-Kuwait border, as well as the surrender of a handful of Iraqi soldiers.

"Someone said that spurred the market, but I didn't see anyone jumping around saying it's be-all-end-all," said Bob Basel, director of listed trading at Salomon Smith Barney. "It's a piece of positive news,

but the market was up and down all day."

Other recent war-related trends continued in other markets as well. The 10-year Treasury fell 20/32 to 99 4/32, its yield rising to 3.98%. Meanwhile, crude futures fell 5.6% to $29.88, gold dipped 0.4% to $333.20 per ounce, and the U.S. Dollar Index rose 0.73 to 101.59.

Big Mo's Ebb and Flow

Looking one step ahead of immediate considerations, there were some underlying developments during the session that may indicate a note of caution is warranted for those getting caught up in war-fever rally. Most notable was the weakness in three favorite groups of momentum traders, namely software, semiconductors and biotech.

Software stocks fell in the wake of Tuesday night's disappointing guidance from

Oracle

(ORCL) - Get Report

, which fell 7.7%. Among the names down in sympathy were

Mercury Interactive

(MERQ)

, down 6%,

Quest Software

(QSFT)

, off 6.5%, and

Symantec

(SYMC) - Get Report

, which lost 6.1%. The Goldman Sachs Software Index fell 2.7%.

Semiconductor shares, meanwhile, were hit by a warning from

Microchip Technology

(MCHP) - Get Report

, which declined 9.4%. Separately, Pacific Growth Equities, a San Francisco-based boutique investment bank, downgraded several other chip-related names, including:

Altera

(ALTR) - Get Report

, which lost 3.8%, and

Xilinx

(XLNX) - Get Report

, which lost 2.2%.

"Unless the end markets for semiconductors improve in the near term, the recent outperformance of semiconductor stocks is unlikely to be sustained," wrote Jim Liang, senior analyst at Pacific Growth Equities. "We believe that in general, semiconductor stock valuation is ahead of fundamentals."

On a fundamental note, the semiconductor-equipment book-to-bill ratio rose to 0.99 last month, reflecting a 5.8% jump in new orders to $781.7 million. Nevertheless, the Philadelphia Stock Exchange Semiconductor Index fell 0.5%.

Finally, biotech shares slid in the wake of a warning by

Applied Biosystems

(ABI)

, which tumbled 18.9%. Also,

Biomet

(BMET)

fell 4.2% after posting third-quarter earnings in line with estimates. The Amex Biotech Index fell 0.5%.

The point here is not to overstate the significance of Wednesday's setback for these groups. The SOX is still up nearly 17%, and the biotech index by 11.2% in the past week alone. Meanwhile, the Comp remains up 4.6% year to date and a healthy 25.4% above its October (closing) lows.

Rather, the point is to think of groups such as semiconductors, software and biotech as leading indicators of broader market activity. Semis, in particular, are considered by many to be the linchpin of the broader technology sector, and that is why there's been so much emphasis on the group since the tech bubble burst. Because all three sectors are favorites of short-term-oriented, momentum-style traders, they also provide a window into the psyche of Wall Street's equivalent of frontline soldiers. Wednesday's action might suggest those folks are feeling like booking profits is the prudent course vs. trying to press bets.

If past is prologue, money coming out of those groups will cycle into more defensive sectors first, then out of stocks altogether if another downturn is coming.

Given the heated anticipation of conflict vs. Iraq, it would be the height of irony if stocks

fell

at the sound of cannons. But just as bears must consider what could go right, bulls have to consider the alternative to the "war equals rally" strategy, or that maybe it's already happened.

"We're up a pretty good percentage in the past few days. To think we'll walk in tomorrow and have a 300

Dow point rally seems a little silly," Basel said. "If we're down people will say "buy on rumor, sell the news.'"

In the coming days/weeks, major averages will likely rally toward the top end of recent trading ranges -- around 9000 for the Dow, 954 for the S&P and 1521 for the Comp -- and "stop right there," the trader forecast. "Then we'll start focusing on war and if that's going well, we'll go back to economic factors."

What's inescapable is stocks have done better of late as anticipation of war has intensified and the focus on economic fundamentals has waned.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.