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The final hour of trading proved unkind to shares, once again suggesting the so-called smart money remains predisposed to sell.

After trading as high as 8152.08 midday, the

Dow Jones Industrial Average

closed up 0.7% to 8109.82. The

S&P 500

rose 0.5% to 860.32 vs. its early best of 864.66 and the

Nasdaq Composite

was up 0.2% to 1323.79, after having traded as high as 1335.76.

As

discussed earlier, the stock market's early strength followed gains in the dollar. But after benefiting from some comments about yen sales by Japanese officials and some stronger-than-expected economic data, the greenback also faded from its earlier heights. After trading above 100.20, the U.S. Dollar Index finished down 0.10 to 99.81. As is often the case, gold rallied as the dollar labored, with the metal up 0.7% to $371.60 per ounce.

Events contributing to the dollar's -- and stock market's -- afternoon dip included rising tensions between the U.S. and North Korea, which is reportedly "in full combat readiness to cope with U.S. imperialist warmongers," according to the country's state-sponsored media. Also, concerns remain high about near-term military action against Iraq. Arguably, such concerns -- and anticipation of Secretary of State Colin Powell's planned speech at the U.N. on Wednesday -- contributed to a distinct lull in trading activity.

In

New York Stock Exchange

activity, 1.2 billion shares traded, while 1.1 billion were exchanged over the counter.

Fundamental issues might also explain U.S. financial markets' late-day weakness, issues which Jim O'Neill, head of global economic research at Goldman Sachs, cited in downgrading his short- and medium-term forecasts for the dollar.

"Call me old-fashioned, but it seems to me that the sizeable imbalances that persist in the United States ... are the main reason for U.S. dollar weakness," O'Neill wrote Monday, citing growth in the trade and current account deficits. "The war is not going to change this issue one way or the other."

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The third deficit, the federal budget, also looks to expand dramatically. Under President Bush's $2.23 trillion budget proposal, a record $307 billion deficit will emerge in fiscal 2004. Confirming fears the government will therefore need to increase its borrowing, the U.S. Treasury estimated Monday that it will increase the amount of its debt sales this quarter to $110 billion from $84 billion previously.

The price of the 10-year Treasury closed down 9/32 to 100, its yield rising to 4%, although the benchmark note finished above its worst levels of the session. Treasuries also were weakened by the morning's stronger-than-expected construction spending report and solid results from the Institute for Supply Management's index of manufacturing conditions.

Two 'Warring' Camps

In talking down the influence of war on the greenback, Goldman's O'Neill cut to the chase of what is now the crucial debate on Wall Street.

"You either believe that the U.S. has no structural issues and once the war issue is out of the way, U.S. asset prices and the dollar recover their

past luster of two-three years ago," he wrote. "Or that the war is a red herring, and once it is over, this fact will soon become apparent."

As discussed last week, I'm in the latter camp, which seems to be growing -- and I'm not just talking about the results of

Friday's poll.

"The ubiquitous sense that there is going to be a huge stock market rally once the war begins worries the heck out of us," commented Jeffrey Saut, chief investment strategist at Raymond James. "Indeed, the Hitchock

ian twist this time could be that after an initial attempt to rally when the bombs start falling, stocks swoon on the realization that a U.S. occupation of Iraq will cost America hundreds of billions of dollars."

Nevertheless, Saut believes a "tradeable rally" could begin this week, although he recommends maintaining tight stop-losses. "We don't want to get sheared," he quipped, noting the Chinese calendar's "year of the sheep" has begun.

Lest you think "everyone" is now suddenly on this skeptical bent, note that the sell-side indicator used by Merrill Lynch strategist Rich Bernstein rose to 67.8% on Jan. 31 from 67.4% at the end of December. In other words, Wall Street strategists remain quite optimistic. (As reported previously, the sell-side indicator is a measure of Wall Street strategists' relative bullishness, and it has been a reliable contrary indicator in recent years.)

"The consensus is clearly bullish by our reckoning, and history suggests that the consensus is typically wrong," Bernstein wrote. "Thus, the question is, what could be lurking in the wings to alter that consensus?"

Answering his own question, the strategist wrote that "investors seem overly sanguine regarding the potential war and oil prices," suggesting the analogy of the 1991 Gulf War and the market's reaction to it may not prove accurate.

Over at

Cross Currents

the oft-bearish editor Alan Newman offers a (what else?) cynical view of near-term rally prospects. Observing the persistent strength of bulls in the

Investors Intelligence

survey and still-low cash holdings by mutual funds, he wrote with amazement that "so-called professionals

still

believe the risks are being

out of stocks

, rather than in stocks." (Emphasis his.)

Newman believes a retest of the October lows could occur by the end of this quarter, recommending a short position in the

iShares U.S. Technology Sector Index fund

(IYW) - Get iShares U.S. Technology ETF Report

.

I know that's a lot of negativity, especially on a day when major averages closed higher. But before the current fixation on war fears, the majority on Wall Street were saying "if we just can get past X" everything would be fine -- be it fears of more domestic terrorism, Jim Jeffords switching parties, Al Gore insisting on a recount, Bill Clinton, etc., etc.

"Gee, they forgot the Ice Capades," quipped one longtime reader. "Of course, the southern descent of all those charts has nothing to do with valuation" and/or declining fundamentals.

Moved and Shaken

It's impossible to quantify the impact of the Columbia disaster, and perverse to try. The NYSE observed a two-minute moment of silence in honor of the seven astronauts killed in Saturday's crash. Still, Wall Street is ultimately a cold, calculating place, and shares of some NASA contractors fell sharply, most notably

Alliant Techsystems

(ATK)

, which lost 11.7%. Meanwhile,

Boeing

(BA) - Get Boeing Company Report

slid 1.5% and

Lockheed Martin

(LMT) - Get Lockheed Martin Corporation Report

dipped 2.9%.

Much of the day's other notable company news was also to the downside, indicating the averages' gains were largely the result of macroeconomic and technical factors. Among names in the news:

Accredo Health

(ACDO)

, fell 21.5% after lowering guidance for 2003;

Ericsson

(ERICY)

, lost 10.5% after posting a larger-than-expected fourth-quarter loss and warning about first-quarter sales, and

Cosi

(COSI)

tumbled 29.5% after the sandwich chain's CEO resigned.

Names on the upside included

Mattel

(MAT) - Get Mattel, Inc. Report

, which rose 5.2% after reporting stronger-than-expected quarterly results, and

Eastman Kodak

(EK)

, which gained 4.3% following some positive comments in the latest edition of

Barron's

. Major oil producers, such as

Exxon Mobil

(XOM) - Get Exxon Mobil Corporation Report

, also rose to support major averages after being discussed positively in the financial weekly.

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.