A week ago, major equity averages were careening toward multiyear lows. After Tuesday's robust advance, they scored their first four-day rally since August and one of the most powerful short-term rallies in years.

Building on gains in overseas markets and buoyed by better-than-expected earnings from bellwether names such as

Citigroup

(C) - Get Report

,

General Motors

(GM) - Get Report

,

Fannie Mae

, and

Bank of America

(BAC) - Get Report

U.S. stock proxies bolted higher from the opening of trading and barely paused thereafter on the path to higher levels.

Positive comments by Goldman Sachs about

Microsoft

(MSFT) - Get Report

, which rose 2%, and

PhilipMorris

(MO) - Get Report

, up 4.5%, further aided the advance.

The

Dow Jones Industrial Average

rallied 4.8% to 8255.68, while the

S&P 500

jumped 4.7% to 881.26 and the

Nasdaq Composite

climbed 5.1% to 1282.44. In the past four trading days, the S&P 500 has risen 13.5%, its best four-day rally since 1974,

Bloomberg

reported.

At nearly 1.9 billion shares, trading on the

Big Board

was robust, although slightly lower than levels seen last Thursday, when the rally began with a midmorning reversal. Up volume was about 85% of the total, and advancing stocks bested declining issues by 3 to 1.

Breadth indicators were even better in Nasdaq trading, where up volume equaled nearly 90% of the 1.75 billion-share total.

Despite today's impressive performance, the sustainability of the rally will be tested tomorrow. After the close of trading Tuesday,

Intel

(INTC) - Get Report

reported third-quarter earnings that were 2 cents shy of expectations, lowered its forecast for 2002 capital expenditures to $4.7 billion from the previous range of $5 billion to $5.2 billion, and issued some cautious comments about the state of tech spending. Intel shares were trading at $14.35 after hours vs. its regular hours close of $16.52.

The Intel news, particularly regarding capital spending, raises questions about the wisdom of what some called speculative buying Tuesday in shares of tech plays such as

QLogic

(QLGC)

, which rose 12%, and

Marvell Technology

(MRVL) - Get Report

, which gained 14.7%.

Conversely, money was coming out of perceived "safe haven" plays today such as

Procter & Gamble

(PG) - Get Report

and

Coca-Cola

(KO) - Get Report

, the only two Dow components to finish in arrears.

More dramatically, money exited perceived safe havens in Treasury securities, and gold and related shares. The price of the benchmark 10-year Treasury note fell 1 23/32 to 103 2/32, its yield rising to 3.99%. The price of gold fell $5.20 to $313.40, while the Philadelphia Stock Exchange Gold & Silver Index shed 2.7%.

Guts & Glory

Prior to Intel's postclose announcement, as well as disappointing results from

Novellus Systems

(NVLS)

, much of the focus was on whether or not the rally was mainly short-covering or fundamental buying.

Traveling in New York this week, I today had lunch with one of the best hedge-fund managers I know, who shed some light on the current market. He runs about $700 million and is up more than 40% net of fees year to date. Unfortunately, he must remain anonymous for this story because he's raising money later this year and can't risk being accused of marketing his hedge fund, which the

Securiteis and Exchange Commission

forbids.

Currently, his fund is more than 50% long, or the longest it has been in more than two years. The manager said this long position, which has been building in recent weeks, was not a "macro" bet but rather the result of his shorts "collapsing" and longs getting more attractive, both due to the market's tumble. In other words, he felt even some "terminal shorts" such as

Goodyear Tire

(GT) - Get Report

had become overly weak during the recent selloff, prompting him to cover. Simultaneously, some names he likes from the long side, such as

Dean Foods

(DF) - Get Report

, had reached levels where he felt more comfortable adding exposure.

The money manager also made the observation that the recent selloff was "more rational" than the one in July, noting that stocks he favors, such as

ExxonMobil

,

(XOM) - Get Report

didn't trade anywhere near as low last week as they did in late July, even though major averages were setting new lows. This, he said, made the more recent selloff more difficult because it wasn't as easy to spot the true bargains vs. names that deserved to be thrashed.

The fund manager's comments recalled those of Thomas McManus, equity strategist at Banc of America Securities. He

recently opined that shareholders were "separating the hostages from the culprits" during the recent selloff. In June-July, the selling was indiscriminate.

McManus repeated that analogy yesterday as he raised his recommended equity allocation to 70% from 65%, simultaneously reducing bonds to 20% from 25%.

McManus has been steadily lifting his recommended equity allocation since midsummer, and presuming institutional shareholders follow his advice, its fair to say some actual buying has accompanied the short-covering frenzy. Many money managers say they are itching to put idle cash to work, and some are praying for relief from positions that weren't working. They wanted to get in early on any advance, for fear of missing the proverbial train. The past four trading days suggest the lead car, at least, is pretty full right now and not just with shorts who've covered themselves.

"Last week's reversal strikes us as an important signal that the bottoming process has entered a new phase," McManus wrote on Monday. Tuesday's action suggests that indeed it was, but another "new phase" begins tomorrow.

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.