Stocks continued higher Monday, and most pundits will undoubtedly gush about the performance of technology stocks, which once again were at the rally's vanguard. But the real battle -- and the ultimate arbiter of the market's fate -- lies in the financial sector.

The Philadelphia Stock Exchange/KBW Bank Index rose 0.7% to 881.98 Monday, but was down 4% heading into this week since hitting a 52-week high of 924 in mid-July. Meanwhile, the

S&P 500

had risen 2% in the same period and hit a 52-week high just last week.

While bulls are riding high right now, the performance of financial shares is a potential fly in the ointment that should not be overlooked. Some observers worry their recent slippage is a harbinger of something wicked for the broader market.

"With the financials comprising roughly 20% of the S&P 500, and contributing about 40% of the profits, their underperformance is problematic for the aggregate indices," surmised Jeffrey Saut, chief equity strategist at Raymond James. "It also may imply that there is 'trouble in paradise' caused by the recent backup in interest rates."

Recalling the rate-inspired implosions at savings and loans in 1989, Orange County, Calif., and Mexico in 1994, and Long-Term Capital Management in 1998, Saut finds it "difficult to believe that one of the biggest rate ratchets in history, within a two-month time span, has created no casualties."

Furthermore, the strategist worried the mutual fund scandal revealed last week is a "burgeoning financial crisis," although he agreed the

impact on investor sentiment is minor, thus far.

Saut views last week's

technical breakout by major averages as a "fakeout," believing the economy will cool off noticeably later this year after the impact of the "refinance afterburner" and July tax rebates abate. Still, he remains long the

Dow Diamonds

(DIA) - Get Report

and believes "the upside should continue to be given the benefit of the doubt" until (unless) the

Dow Jones Industrial Average

suffers an intraday reversal of more than 5%.

As with Saut, Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray in Minneapolis, is less effusive about the broader market's prospects than many gurus. Not coincidentally, he is also concerned about financials. On Monday, Belski downgraded the sector to underweight from market weight, citing its recent underperformance vs. the S&P 500, a belief the sector is "overowned" and that investors will seek "growthier cyclicals" now that economic recovery is more widely acknowledged.

Finally, Belski suggested the recent rise in Treasury yields will undermine the earnings growth and margin expansion of financial names.

On the other, more bullish, hand, Smith Barney chief U.S. equity strategist Tobias Levkovich maintains an overweight recommendation on financials, a position he acknowledged is controversial.

"Investors seem to be concerned about the sector, particularly since it has been a relatively safe place to stash money for the past three years," Levkovich wrote. "And while we do admit that sector rotation could continue to occur as investors raise their risk tolerance and turn their attention on industries capable of showing greater incremental earnings improvement going forward, we continue to believe that the fundamentals of this industry are quite strong."

How this shakes out remains, of course, to be seen. Still, bulls such as Levkovich remained in the catbird seat Monday as the Dow rose 0.9% to 9586.29, ending just below Thursday's close. Even better (for those long), the S&P 500 gained 1% to a new 52-week high of 1031.64 and the

Nasdaq Composite

climbed 1.6% to 1888.65, its best finish since March 12, 2002.

Is Everybody Happy?

Stocks were buoyed by another analyst upgrade of

IBM

(IBM) - Get Report

, upbeat comments from

RF Micro Devices

(RFMD)

, strength in pharmaceuticals following positive comments about the sector in

Barron's

, and more rumors of the impending capture of Osama bin Laden.

Shares also got a boost from renewed weakness in Treasuries ahead of this week's auction of five- and 10-year notes, and concerns about forthcoming supply following President Bush's request Sunday night for another $87 billion to fight terrorism.

The price of the benchmark 10-year Treasury ended down 19/32 to 98 19/32, its yield rising to 4.42%.

Finally, shares rose because they've been on the rise for nearly a year now, and most definitively for the past six months. While sentiment among hard-core traders, as measured by surveys at

RealMoney.com

and LowRisk.com, suggest bearishness is on the rise, other indicators suggest runaway bullishness.

These include: mutual fund inflows, the American Association of Individual Investors' sentiment survey (at 62.3% bulls), the CBOE Market Volatility Index (now below 19 for the first time since March 28, 2002) and the put/call ratio (at 0.61 late Monday), the one-day Arms Index falling to 0.67 from 1.15 Friday, as well as anecdotal evidence such as Monday's

Wall Street Journal

story about rising investor confidence.

"The primary driver behind this market looks like plain and simple momentum," observed

RealMoney.com

contributor James De Porre. "Stocks are going up and folks are afraid of being left behind. The more we rally, the more frustrating it is to be left behind and the greater the inclination to chase stocks higher."

The momentum was reflected in market breadth, where advancing stocks led decliners 23-to-9 and new 52-week highs led new lows 323-to-5 in

NYSE

trading, while gainers led 21-to-10 and new highs bested new lows 397-to-6 in over-the-counter trading. At 1.3 billion shares in the former and 1.9 billion shares in the latter, volume was solid, especially for a Monday.

Of course, the skeptics believe rising confidence, along with an apparent lack of concern about fundamentals, valuations and the potential risks, is a recipe for a painful reversal. Then again, such concerns have been voiced for some time now, which may be why they're increasingly falling on deaf ears. That, ironically, makes naysayers even more convinced in the righteousness of their beliefs.

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.