A sharp drop in crude oil prices, upbeat results from

Alcoa

(AA) - Get Report

and a reassuring outlook from

Dell

(DELL) - Get Report

cast a positive light on the market at the onset of the first-quarter earnings season.

As the market rolled through its fourth consecutive session of gains, the question begs: Can the April rally continue through earnings season and as oil prices remain above $50?

The

Dow Jones Industrial Average

rose 60.30, or 0.58%, to 10,546.32. The

S&P 500

added 7.07 points, or 0.6% to 1,191.14. The

Nasdaq Composite

lifted by 19.65 points, or 1% to 2,018.79. Breadth was positive, with advancers beating decliners 5 to 3 on the

NYSE

, where 1.5 billion shares changed hands. Gainers led 19 to 12 on the Nasdaq, where 1.7 billion shares were exchanged.

Oil plunged 3% on the back of Wednesday's reports of accumulating crude oil inventories. The May contract finished down $1.74 to $54.11 a barrel in Nymex trading. Oil prices have slid 5% since last Friday.

The sharp pullback in crude oil prices definitely provided strong support to the market. But it was interesting to note that, just like Wednesday, major indices maintained a positive trend in the morning, even though oil prices were higher in the first part of the session.

Does that indicate the market is now ready to deal with oil prices remaining in their current range? That may be the key issue to determine whether or not an April rally can be maintained. But so far, the calls reported

here for such a rally by veteran market watchers Don Hays, Paul Desmond and Merrill Lynch's Richard McCabe are looking pretty good.

Goldman Back to the (Oil) Well

Now, of course, there are many hurdles before such a rally can unfold. First, oil prices would need to stabilize within their current trading range of $50-$57.

After forecasting last week that oil prices could experience a "super spike" to as high as $105, Goldman Sachs issued another note Thursday detailing what the impact of such a spike would be on the U.S. economy.

In a demand-generated spike, there would be a significant increase in inflation, a much tighter approach to monetary policy, and significantly slower growth -- but not to a recessionary point, Goldman says. In a supply-generated spike, there would be a high probability of a U.S. recession, monetary easing and transitory inflation, Goldman says.

More interestingly for the market right now, Goldman analysts believe that oil prices will average $50 a barrel for 2005 and $55 in 2006. Under this scenario, the impact on GDP growth, inflation and the significance for the Fed's tightening policy are "insignificant," they say.

Living with Oil

If the current oil price trading range were maintained, that would be good for overall market sentiment. But the next hurdle to the April rally, and beyond, will be first-quarter earnings.

The market's ups and downs have closely followed the ebb and flow of oil prices, mainly on concerns over what it will mean for earnings down the line. And this earnings season will reveal not only if there is an existing impact on bottom lines, but also what that impact may be.

"Living with it is one thing," says Barry Hyman, chief equity market strategist at Ehrenkrantz King Nussbaum, of higher oil prices. "Living with and/or prospering with it, I think that's what the market is trying to figure out."

At current economic growth levels, it's hard to argue with the proposition that the market would have performed a lot better in the first quarter absent the oil factor. Much has been said about the U.S. economy's resilience to higher oil prices -- the economy's now a lot more service-based than in the last crude-oil spike in the 1970s. But "the simple fact is that

with oil at these prices, it ain't a positive," Hyman says.

Producer prices have gone up, which is hitting the cost side of many companies. As the first-quarter earnings start in earnest, the impact of higher oil will become clearer, of course.

"It will vary from sector to sector," Hyman says. "But this evaluation will lead to a transition in the market, as the potential for earnings disappointment going forward

this year becomes greater. I do worry about it, and I am thinking about how to revise my forecasts."

Alcoa, which posted solid first-quarter earnings Wednesday and rose 4.9% Thursday, managed to pass along some of its energy-related cost increases, according to Chief Financial Officer Richard Kelson.

But how many other companies will be able to do the same? Furthermore, what will the trend of passing along higher prices up the production line mean for the consumer?

U.S. consumers will be asked to pay higher prices, while they're already showing signs of a diminishing appetite.

March chain-store sales results came in at 4.1%, compared with 4.7% in February and 3.6% in January. But the March results were inflated by this year's early Easter, a season typically associated with a surge in consumer spending.

Without the Easter factor, the impact of unusually cold weather and higher gasoline prices reveal a different picture, according to the International Council of Shopping Centers. Mike Niemera, its chief economist said: "We're probably seeing a slower pace of sales in March, and that is likely to continue in April."

In a nutshell, specialty and high-end retailers such as

Bebe Stores

(BEBE)

and

Nordstrom's

(JWN) - Get Report

did well, while midtier and department store chains such as

Gap

(GPS) - Get Report

and

May Department Stores

(MAY)

disappointed.

Wal-Mart

(WMT) - Get Report

, the world's largest retailer, reported better-than-expected sales for March but then guided earnings lower. Wal-Mart shares fell 1%.

Bed Bath & Beyond

(BBBY) - Get Report

was one of the big winners Thursday, rising 10.7% after reporting a 5.1% same-store sales increase and better-than-expected fourth-quarter earnings.

Jawboning on Jobs

A softer jobs market, as shown in the March employment report, is also being blamed on this year's early Easter effect, say economists such as

High Frequency Economics'

Ian Sheperdson.

Weekly jobless claims, one of the few economics reports on the agenda this week, fell more than expected, by 19,000, to 334,000 in the week ended April 2. However, the previous week's number was revised higher to 353,000 from 350,000, leaving the four-week average unchanged at 336,500.

But according to Philadelphia Fed president Anthony Santomero, analysts should "not overemphasize" short-term swings in jobs data. The comments were made in response to questions about March payroll weakness after Santomero's speech at the National Economists Club in Washington, according to

Bloomberg

.

The benchmark 10-year Treasury note fell while its yield rose to 4.48%, as the market interpreted the comments as hawkish for interest rates. The yield had recently fallen to a six-week low after the March report lowered expectations that rates would go up faster than the Fed's current "measured" pace.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.