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Fear Takes a Holiday

Upbeat reports on home and retail sales, and falling crude lift stocks.

Investors traded in fear for optimism Tuesday as the market's thorniest patches delivered positive nuggets. But most traders weren't extrapolating much from swings in this holiday-shortened, pre-earnings season week.

Major stock market indices surged Tuesday as crude oil prices fell, the dollar rose, chain stores reported a strong week and pending home sales improved. Even the sector everyone loves to love, technology, rallied Tuesday as Internet favorite


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soared 3.1% on Goldman Sachs' upgrade and its announcement of a foray into television in partnership with satellite company


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. EchoStar jumped 1.2%.


Nasdaq Composite

led the three major indices Tuesday, gaining 1.1% to close at 2450.33. The

Dow Jones Industrial Average

jumped 1%, or 128 points, to close at 12,510.30. The

S&P 500

gained 0.9% on the day to close at 1437.77.

The cost of a barrel of light, sweet crude fell abut 1.9% Tuesday to close at $64.64. Traders attributed the drop to profit-taking and to some easing of tensions over the hostage situation in Iran.

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"It is telling that people are easing back on their fears," Marc Pado, chief market analyst at Cantor Fitzgerald says of the advance. But he warns that earnings will set the tone for the market in the second quarter, not "a day like today when you erase some of the fears about oil."

Louise Yamada, of Louise Yamada Technical Research Advisors, agrees investors shouldn't jump to conclusions about this week's action. "The rally has improved," says Yamada, noting that the number of advancing stocks vs. declining is strongly to the advancing side, but "this week will be very sporadic."

Also boosted by the oil-price decline,

Continental Airlines

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gained 8.4% when it reported a surge in March traffic.



did not see the same surge in traffic, but after capacity cuts, the airline's planes were fuller. AMR gained 5.3% on the day.



gained 4.8% and


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added 3.6%.

The rest of the transportation sector also fared well Tuesday. The Dow Jones Transportation Average added 1.8% as trucking companies




YRC Worldwide

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gained 3.4% and 2.4%, respectively.


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added 1.5%.

The homebuilder stocks and retailers gained ground on a stronger than expected 0.7% jump in pending home sales in February. The Philadelphia Homebuilders Sector Index gained 1.4%. Likewise, chain-store sales in the week ended March 31 increased 0.3% to make for a 1.2% increase over the past three weeks. High-end retailers





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gained 1.6% and 3.1%, respectively.

The withering mortgage lenders caught a breath as well. A day after subprime mortgage lender

New Century Financial


filed for Chapter 11 bankruptcy protection,

Accredited Home Lenders

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announced it received $1.1 billion in financing to help it keep going. Accredited gained 18.4%, while mortgage-exposed banks like


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Washington Mutual

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gained 1.6% and 1.4%, respectively.

But the financial sector is not out of the woods, say most strategists, and it may not bode well for the overall market. Yamada believes money is rotating out of the financial sector, which comprises more than 20% of the S&P 500, and moving into the utilities sector, which are high-yielding stocks and considered defensive. The Dow Jones Utilities Index reached an all-time high Monday. It was off a fraction Tuesday.

"Financials is a sector I am watching carefully," says Thomas McManus, chief equities strategist at Bank of America. "The relative poor performance of financials is a negative."

McManus believes the market's course will take its cues from earnings season, which kicks off next week when


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reports Tuesday after the bell.

"Once earnings season starts, you typically see a wave of positive preannouncements, but that doesn't mean that the whole season will be better than expected," he says. "We still think investors are in for a dose of more rational outlooks and more downbeat outlooks than they've become accustomed to over the last several years."

McManus believes earnings guidance is likely to be conservative, which could set up for some positive surprises, particularly from the marquee large-cap companies. But the market "will be weighing the popular vote, not the electoral vote," he says.

In other words, what matters more than the one large-cap surprise that pulls up year-over-year growth averages is the number of voices in the same sector saying things are getting tougher. Overall, McManus expects year-over-year earnings growth in the first quarter at 3%.

According to Thomson First Call, year-over-year earnings growth for the S&P 500 in the first quarter is expected at 3.7%, down from expectations of 8.7% growth at the start of the year. Most of the deterioration has come from the energy sector, which is now expected to show a 3% decline in year-over-year growth. Expectations for growth in the technology and consumer discretionary sectors also are deteriorating, says John Butters, a Thomson analyst.

Supporting the notion that companies are becoming more cautions with their guidance, the number of positive preannouncements is down 20% to 40% compared with any of the past four quarters, says Butters. The number of negatives announcements has not increased.

So enjoy the breather while it lasts, because the notion of "everything going my way" is just a corny song from a musical, not a sustainable state for the stock market.

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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