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Updated from 4:02 p.m. EST

Stocks closed higher Monday, as a late move helped the

Dow

and

S&P 500

set new 19-month highs. Investors shrugged off the government's heightened terror alert and a moderate earthquake in central California.

The Dow advanced 59.78 points, or 0.6%, to 10,338, setting a new 19-month high for the fifth straight session. The S&P 500 gained 4.27 points, or 0.4%, to 1092.94; and the

Nasdaq Composite

improved 4.78 points, or 0.3%, to 1955.80. The Nasdaq once again underperformed as investors rotate from technology to cyclical stocks.

Volume was very light ahead of the Christmas holiday; 1.25 billion shares traded on the

New York Stock Exchange

, while 1.27 billion shares changed hands on the Nasdaq. Advancers beat decliners by about 3 to 2 on the NYSE and were close to even on the Nasdaq.

"The market was very cautious this morning following the heightened terror alert," said Michael O'Hare, head of block trading at Lehman Brothers. "But investors got a lot more confident as the day progressed and got back down to business."

On Sunday, Secretary of Homeland Security Tom Ridge raised the national security level to orange from yellow, citing intelligence that implies a potential terror threat "perhaps greater now than at any point since Sept. 11, 2001." Orange is the government's second-highest level.

With the major indices already up sharply this year, investors turned focus to the year ahead.

"Most investors realize that earnings growth will not be as dramatic next year, because of less favorable comparables," said Bernadette Murphy, chief market analyst at Kimelman & Baird. "But the quality should improve, as the economy turns."

TheStreet Recommends

Meanwhile, stocks hiccupped on word that a magnitude 6.5 earthquake stuck central California around 2:15 p.m. EST. The quake was felt in Los Angeles and San Francisco, but so far no major damage has been reported.

Other Markets

Markets overseas finished mixed. London's FTSE 100 rose 0.3% at 4424, while Germany's Xetra DAX fell 0.6% to 3877. Hong Kong's Hang Seng finished up 0.9% at 12,488, and Japan's Nikkei advanced 0.9% at 10,372.

The 10-year Treasury note fell 8/32, its yield rising to 4.16%, while the dollar slumped to $1.24 per euro. The U.S currency was also weaker vs. the Japanese yen.

Equity Alternatives?

Stocks continued their march forward, despite the government's decision to raise the terror alert and no significant offset to boost the market. Many still point to improving trends on the economic and earnings fronts to explain the continued strength, but some are growing concerned that stock prices are becoming artificially high because there is no viable alternative for investors flush with cash.

"The market is showing its resiliency and there remains a bid, because investors really have no place else to go with their money," said Larry Wachtel, a market analyst at Prudential Securities.

"The

Federal Reserve

has succeeded in pumping huge amounts of liquidity into the system, so investors have money and feel compelled to do something," said James Melcher, market strategist at Balestra Capital. "And the idea of less than 1% yields on money market funds galls them, because after taxes you are actually going backwards when you account for inflation."

The Treasury market is also relatively unattractive, because the fed funds rate remains at a 45-year low of 1% despite the economy's 8.2% surge in the third quarter. "Currently, there is not an incentive to buy bonds, because we don't know when interest rates are going to increase," said Murphy.

"So people are being forced into the market," said Melcher. This move is being exacerbated because "at this time of year, pension funds generally buy more stocks than bonds because they can assume 8.5% returns, rather than 4.5% returns in bonds."

"There aren't too many alternatives; some very large institutions have gone to alternative investments like hedge funds, distressed debt and emerging markets, but the average investor is not yet comfortable with this," said Murphy.

Movers

In corporate news,

Ford

(F) - Get Ford Motor Company Report

raised its full-year 2003 earnings guidance to $1.05 to $1.10 a share on Monday, vs. analysts' consensus of $1.07 a share. The company said it will also have certain fourth-quarter charges. Ford shares rallied $1.55, or 10.2%, to $16.79.

Shares of

Sears

(S) - Get SentinelOne, Inc. Class A Report

slipped 45 cents, or 1%, to $44.39, after Bear Stearns lowered its third-quarter and full-year 2003 earnings estimates for the company.

Shares of

Esperion Therapeutics

(ESPR) - Get Esperion Therapeutics, Inc. Report

surged $11.83, or 52.1%, to $34.30 after

Pfizer

(PFE) - Get Pfizer Inc. Report

said Sunday it will acquire the company for $1.3 billion in cash. Shares of Pfizer rose 3 cents, or 0.1%, to $34.30.

In Monday research, J.P. Morgan upgraded

PalmOne

(PLMO)

to neutral from underweight. Shares of the company gained 15 cents, or 1.4%, at $10.67.

Shares of

Honeywell

(HON) - Get Honeywell International Inc. Report

rose 99 cents, or 3.1%, to $32.81, after a favorable article in

Barron's

that characterized the company's valuation as attractive relative to that of other multi-industry giants.

On the economic front Tuesday, personal income is expected to hold steady at 0.4% in November, while personal spending is expected to improve to 0.7% after finishing unchanged in the previous month. The University of Michigan consumer sentiment is expected to be revised up to 91.0 in December, from the initial reading of 89.6.

In addition, the final revision to third-quarter GDP will be released. Economists expect the growth rate to remain unchanged at 8.2% in the third-quarter.