Wall Street was looking at the world through rose-colored glasses Monday as more positive news from Iraq and some upbeat corporate earnings spurred major averages higher. The advance came amid tepid volume, undermining its significance, and despite more disappointing economic data, indicating an undercurrent of optimism that's out of sync with reality.

Another example of traders' glass-is-half-full approach was the absence of a negative impact from the Senate's budget late Friday effectively shelving President Bush's dividend tax-reform package, something Wall Street uniformly favored.

Allied forces taking Saddam Hussein's hometown of Tikrit over the weekend and the rescue of seven POWs helped establish a positive tone early Monday, furthered by better-than-expected quarterly results from financial giants

Citigroup

(C) - Get Report

,

Fannie Mae

(FNM)

and

Bank of America

(BAC) - Get Report

, as well as positive guidance from

GM Hughes

(GMH)

.

In a change from recent trends, optimists were able to build upon and extend the early gains as major averages finished near session highs.

The

Dow Jones Industrial Average

rose 1.8% to 8351.10, the

S&P 500

gained 2% to 885.23 and the

Nasdaq Composite

rose 1.9% to 1384.95.

Strength in shares engendered weakness in gold, which stumbled 1.1% to $324.90 per ounce while the Philadelphia Stock Exchange Gold & Silver Index dipped 0.4%.

In

New York Stock Exchange

trading, just 1.1 billion shares changed hands while advancing stocks led decliners 23 to 8. Over-the-counter results were similar.

Some participants were reportedly holding back ahead of earnings reports from tech bellwethers this week, beginning with

IBM

(IBM) - Get Report

. (After the close, Big Blue posted first-quarter profits of 79 cents per share, a penny shy of consensus expectations.)

Short-Term Gain, Long-Term Pain

The S&P 500 eclipsed its simple 200-day moving average of 881.42, an accomplishment that proved elusive several times last week, most notably last Monday. The S&P closing above its 200-day moving average could spur more strength in the coming days.

"A lot of technicians are watching" the 200-day and could "enter buy orders if we punch through significantly," said Kevin Depew, technical analyst at Dorsey, Wright & Associates.

Such a development would jibe with the firm's currently upbeat view.

"Right now all of our main indicators are short-term bullish," Depew said, albeit only moderately so for the firm's primary indicator, the NYSE bullish percentage, which is at 40%. Readings below 30%, as occurred in October, are "no-brainers" on the bullish side, he said; the opposite is true for readings above 70%, as occurred last April.

(The NYSE bullish percentage indicator is calculated by dividing the number of NYSE stocks trading on new point-and-figure buy signals by the total listed on the exchange. Point-and-figure charts are pure price charts that plot supply and demand without factoring in time or volume.)

In addition, point and figure charts of the Dow and S&P "don't look that bad here" and, at 66%, the percent of Big Board stocks trading above their 10-week moving average is bullish, Depew said. (The 10-week index typically tops out above 70%, he noted.)

Having said that, Depew stressed the "structural bear market" remains intact and predicted "we'll ultimately see lower lows" for major averages. Moreover, he jokingly described himself as a "dumb technician" who "just looks at indicators," adding that "when short-term indicators slip, we'll become more defensive minded."

This gets back to the age-old question of whether technicals lead fundamentals or vice versa. Either technicals lead or they're going to be proven wrong, because the immediate fundamental outlook remains murky, at best.

Hope Springs Eternal

On the economic front, the government reported business inventories rose 0.6% in February, double expectations and the highest level since September 2001. Sales fell 1%, the largest drop since November 2001. The inventory-to-sales ratio -- or the time it will take to deplete inventories if sales remain at current levels -- rose to 1.38 months, the highest since February 2002.

While that's a lagging indicator, rising inventories suggest little need for manufacturers to ramp up production (and presumably hiring) if and when demand rebounds.

Nevertheless, optimism about a rebound in economic activity underscored Monday's gains.

On Sunday, Philadelphia Fed President Anthony Santomero forecast "economic growth accelerating over the course of this year towards a healthy and sustainable pace of around three-to-four percent by year's end and into 2004."

Santomero cautioned that myriad uncertainties remain and that "it is far too soon to declare that the global situation has now been stabilized and the U.S. economy is back on track."

Still, optimism about the second-half recovery remains rampant (new second-half, same recovery).

"We expect a cyclical growth recovery in

second-half 2003 with a favorable composition," including a "global earnings recovery based on

second-half cyclical upswing and corporate restructuring," J.P. Morgan global equity strategist Abhijit Chakrabortti commented Monday.

Concurrently, J.P. Morgan's global economics team sees "sluggish near-term growth" and global GDP under 1.5% in the first half of 2003. But they expect global GDP to rebound to 2.8% in both the second half and 2004, with U.S. growth exceeding 3.5% in the second half of this year.

Chakrabortti cited such expectations and supportive global monetary policy in maintaining a "positive outlook on global equities," with a preference for the U.S. over Europe and an overweight in Japan.

Coincidentally (or not), one of the strategist's top global picks,

Pfizer

(PFE) - Get Report

rose 1.9% Monday after antitrust regulators approved its takeover of

Pharmacia

(PHA)

, which gained 2.5%. Another of his favorites,

United Technologies

, rose 2% and was among the Dow's biggest positive influences.

Optimism about an economic recovery was also cited in the Treasury market's weakness. The price of the benchmark 10-year Treasury fell 10/32 to 98 28/32, its yield rising to 4.01%.

"The consensus 'contrary call' is to buy equities," observed Richard Bernstein, chief U.S. investment strategist at Merrill Lynch. "We feel the true contrary call, which appears to be better supported by fundamentals than is the consensus call, is to buy bonds."

On Monday, Bernstein upped his recommended fixed-income allocation to 45% from 35%, reducing cash to 10% from 20%. Equities remained at 45%, the lowest among so-called major Wall Street strategists. Given chatter about an impending economic rebound and a "bubble" in Treasuries, raising bonds certainly bucks consensus opinion.

The Merrill strategist is not alone in betting this second-half recovery call will work out about as well as the last few ones; that is, not very well.

"Clearly, there should be a postwar bounce to the economic figures," predicted Jeffrey Saut, chief equity strategist at Raymond James. "But regrettably, we think this bounce will prove just as ephemeral as the fleeting bounces of the last few years because this is not your father's typical business cycle."

Saut believes the S&P 500 is unlikely to break out of its 20-month trading range in the 750 to 950 area and, more recently, 844 to 905.

Monday's rally amounted to a light-volume move toward the top end of that range and, until proven otherwise, nothing more.

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.