With Tuesday's high-stakes

mid-term elections and Wednesday's

Federal Reserve

meeting looming, stock proxies might have been expected to drift directionless until midweek. Instead, the recent market momentum kept on ramblin' on Monday.

As of 1:39 p.m. EDT, the

Dow Jones Industrial Average

was up 2%, the

S&P 500

was higher by 2.2%, and the

Nasdaq Composite

was up 3.7%.

Monday's advance actually began late Friday, when

Microsoft

(MSFT) - Get Report

received a favorable ruling in its antitrust case with the government. U.S. District Court Judge Colleen Kollar-Kotelly ruled that a settlement reached in November is in the public interest, helping shares of the market-cap giant rise 6.9%. Microsoft's bounce was giving a major boost to all three major averages.

Ongoing expectations for easing by the Fed on Wednesday were also fueling the advance, despite the questionable economic impact of another rate cut. The fed funds rate has been at a 40-year low for nearly a year now, and

last week's economic data weren't terribly robust. On Monday the government reported that U.S. factory orders fell 2.3% in September vs. a 0.4% drop in August, although September's drop was not as large as economists had expected.

"One would have to be brain-dead not to see that the U.S. economy is showing clear signs of faltering," said David Hunter, chief market strategist a Kelley & Christensen, a

New York Stock Exchange

member firm. "The weak dollar is simply a reflection of foreign investors' recognition that the Fed has not yet done nearly enough to jump-start this economy."

The U.S. Dollar Index, which broke below key technical support levels last week, was lately up 0.15, to 106.23.

Hunter, who has long worried about the threat of deflation, believes the Fed should ease Wednesday, and by 50 basis points rather than 25. "This economy needs new liquidity and it needs it now," he said, suggesting the rally could continue for another week, or two, amid "growing sentiment that 2003 will be a better year for both the economy and the equity markets."

Another easing this week would likely further encourage such views. Still, Hunter believes the economy will falter next year and that the current rally "will once again run into the brick wall of a flawed Fed policy that has been behind the curve throughout this down cycle."

Run & Gun

As for the present, it seems the rally is becoming a self-fulfilling event.

One fund manager, who requested anonymity, observed that "jobs are more on the line than they have even been this year." Therefore, long-only fund managers are desperate to improve their performance before year-end.

"This dynamic adds additional fuel to the normal 'fear of missing' managers feel in a rally, which comes after the denial phase fades," he said. Fund managers "can't afford to take the drubbing they took for 10 months only to lag any year-end rally. I think that's where we are now."

Where we also are is with stock proxies pushing beyond resistance levels, which compels further buying by proponents of technical analysis. For example, at Monday's intraday high of 26.63, the Nasdaq 100 exceeded its August high of 26.21. The Comp, which broke above its short-term downtrend line last week, is also now within striking distance of its August high of 1426.76

The momentum-begets-momentum aspect of the advance was (again) most glaringly evidence in semiconductor and telecom stocks, which continued their recent advance. The Philadelphia Stock Exchange Semiconductor Index was lately up 6%, and the Nasdaq Telecom Index was higher by 4.8%.

The SOX gained despite another analyst warning that the rally was getting overextended. Salomon Smith Barney analyst Glen Yeung reduced his sector weighting on chip-equipment makers to market weight from overweight. Nevertheless,

Applied Materials

(AMAT) - Get Report

was lately up 5.7%,

Novellus Systems

(NVLS)

was higher by 4%, and

KLA-Tencor

(KLAC) - Get Report

was up 3.9%, among other names in the group sporting big gains.

The question, of course, is whether the rally can continue from here, and/or if it's too late for investors who've thus far disbelieved in its staying power.

"The time to be aggressively bullish was six weeks ago, not after a 1,500-point buying stampede," observed Jeffrey Saut, chief market strategist at Raymond James. "On a trading basis, we would sell any 'blue heat' upside hour this week," which Monday's opening would certainly qualify, "and then step back to see how the market's internals look on any ensuing correction."

Saut, who forecast the market could embark upon a rally of "some import" six weeks ago, now contends major averages are "becoming vulnerable to something more than a one-to-three-day pause pullback," citing a variety of technical indicators suggesting the market has become overbought.

For those who disagree with that assessment and wishing to put money to work, he recommended "beaten-up, dividend-paying names with decent fundamentals" such as

Philip Morris

(MO) - Get Report

,

Caterpillar

(CAT) - Get Report

and

British Petroleum

(BP) - Get Report

.

The strategist is long all three, although these are the kinds of names that Wall Street does not seem to crave right now, despite Caterpillar's recent 2.9% gain. But that is precisely Saut's point: Zig when the market zags, as it was doing with enthusiasm heading into Monday's late-afternoon trading.

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.