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The Bulls Pick Up Speed

Whatever the fundamentals say, the attitude on stocks -- if not the dollar -- has turned positive.

"If it looks like a bull, walks like a bull, snorts like a bull..." quipped one trader. The conclusion was left unsaid, but the equity market was certainly looking, walking and snorting like a bull on Tuesday.

After some early hesitation, shares stormed higher midmorning and kept building strength, closing at or near session highs. At day's end, the

Dow Jones Industrial Average

was up 1.9% to 8484.99, the

S&P 500

higher by 2.2% to 911.37, and the

Nasdaq Composite

up 1.9% to 1451.40.

Optimists were further buttressed by market internals. Up volume was nearly 85% of the over 1.6 billion total in

Big Board

trading -- the highest volume since March 21 -- while advancing stocks bested decliners 3 to 1. In over-the-counter trading, up volume was 77% of the nearly 1.1-billion-share total, while gainers led 2 to 1.

"Maybe fundamentals aren't changing, but the psychology is changing," said one institutional salesman who requested anonymity. Fund managers "are reacting to good news and ignoring bad news. Ideas are working, the phones are ringing ... the tone is just great."

How long any up move can be sustained remains to be seen, but the S&P closed above 900 for the first time since Jan. 17, eclipsing a level that had proven to be a point of resistance several times in recent rally attempts. Additionally, the Comp closed at its highest level since Jan. 14, and the Nasdaq 100 closed at its best since early December. Meanwhile, broader indices such as the Russell 2000 and Wilshire 5000 also established their best finishes since mid-January.

Those January closing highs pose the next important technical obstacles for major averages, specifically, 8843 for the Dow, 932 for the S&P and 1461 for the Comp.

Although volume -- especially in Nasdaq activity -- wasn't overwhelmingly strong, about the only real negative evident Tuesday was the weakness in the dollar, which fell most notably vs. the euro, which hit $1.10.

"Psychological and technical factors are weighing on the buck," commented Anne Mills, senior economist at Brown Brothers Harriman. Most notably, "the postwar dollar rally that didn't take place has turned into a significant negative."

Traders often view the dollar as a proxy for demand for U.S. assets, and hardcore bears have long warned of a coming exodus by foreign investors. However, such repatriation has not shown up in long-term fund flow data, and U.S. Treasuries, a favorite of foreigners, dipped only marginally Tuesday after early strength. Gold, often considered an alternative to the buck, also fell Tuesday, down 0.4% to $333.50 per ounce.

In sum, a declining dollar does not necessarily mean U.S. shares will follow suit. Stocks and the dollar have seemingly been falling in tandem since late 2001. But the dollar has fallen in a much more gradual fashion vs. equities, where the broader decline has been punctuated by short and sharp rallies that have largely eluded the greenback.

All News Is Good News

Catalysts cited for Tuesday's rally included more positive earnings news from firms such as

Lockheed Martin

(LMT) - Get Report

,

Eli Lilly

(LLY) - Get Report

,

Pfizer

(PFE) - Get Report

,

Viacom

(VIA) - Get Report

and

Everest Re Group

(RE) - Get Report

TST Recommends

. The latter sparked a rally in other insurance and reinsurance names such as

American International Group

(AIG) - Get Report

and

ACE

(ACE)

.

The S&P Insurance Index rose 3.9% while the Amex Pharmaceutical Index rallied 1.9%, despite a 5.9% drop in

Forest Laboratories

(FRX)

after its results failed to meet expectations.

Sprint

was the day's other major disappointment, falling 5.2% after posting a 4.5% decline in revenue and forecasting no end to the tough times. Despite positive results at

Verizon

(VZ) - Get Report

, which rallied 2.5%, the Amex Telecom Index fell 1%.

Shares were further buoyed by a decline in oil prices amid speculation that OPEC may not announce a major production cut at its meeting in Vienna this week, or that its members may not adhere to it. Speculation of production from allied-control Iraq and the re-establishment of production in Nigeria further helped push crude futures down 3% to $29.91 per barrel.

Beyond those fundamental rationales, shares rose largely because market participants "feel" better about things now that the war is effectively over and first-quarter earnings haven't been nearly as bad as some feared. Notably, there was some hair on some of the positive earnings stories: Eli Lilly, for example, rose 3%, although its first-quarter earnings were down 35% from year-ago levels when one-time charges were included. Similarly, Pfizer, which rose 0.7%, saw its earnings inflated by $2.2 billion of proceeds from the sale of some business lines, a nonrecurring item if ever there was one.

Reflecting the upbeat mood, shares rose midday amid unsubstantiated rumors that Saddam Hussein had been found alive and captured by allied forces. Even speculation that Alan Greenspan will be reappointed by President Bush for another four-year term as

Federal Reserve

chairman was cited as a reason for the rally -- as if the Fed's repeated failures before and after the bubble burst were forgiven and/or forgotten.

Among sentiment indicators, the CBOE Market Volatility Index fell 3.1% to 23.51 while its Nasdaq counterpart lost 5.2% to 33.65, and the 1-day Arms Index shed 50% to 0.50. The put/call ratio fell to 0.89 from 1.36 early in the session, although that was down from Monday's close of 0.71.

Bullish sentiment is often a contrarian indicator, and recent declines in the VIX and VXN, specifically, have generated heavy skepticism about the rally's staying power.

"The more we see complacency, the more we are confident in selling," commented Phil Erlanger, editor of

Erlanger's Squeeze Play

. "However ... the majority is 'gaga' for leadership stocks and is willing to place their money on the line," as evinced by the recent inflows into mutual funds.

Indeed, rising bullish sentiment doesn't

immediately

lead to a reversal; often, it must reach extreme levels and/or be accompanied by overbought indicators. Perhaps Tuesday's session will create that combination, but the 1990s showed that sentiment can get bullish and stay there for a very long time. That is, longer than some short-selling bears can remain solvent, to paraphrase John Maynard Keynes.

I'm not saying we're going back to the halcyon days of the bubble, but Tuesday's session contained some similar elements.

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.