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The stock market was seemingly of two minds this week. Early on, the focus was on quarterly results, and shares rallied sharply. But the week's latter half saw traders' attention turn to economic data and geopolitical developments, which provided excuses for selling a technically overextended market.

In the end, this round of a

running battle between upbeat micro vs. lackluster macro forces was essentially a draw. For the week, the

Dow Jones Industrial Average

fell 0.4%, while the

S&P 500


Nasdaq Composite

each gained 0.6%.

Declines Thursday and, more dramatically, Friday erased almost all gains from earlier in the week, eradicating some of the enthusiasm generated by Tuesday's robust advance. After flatlining Monday, the S&P 500 closed above 900 on Tuesday for the first time since mid-January, while other averages also approached or established three-month highs.

The session generated rising optimism from traders waiting for a "technical breakout" to "confirm" the rally since the mid-March lows. Such sentiment helped spur further buying Wednesday, albeit less aggressively. The midweek gains were further fueled by better-than-expected quarterly results from disparate industry leaders, including


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Volume surged above 1.6 billion shares on the

Big Board

both Tuesday and Wednesday (ultimately the week's busiest days), increasing bullish sentiment. But as is often the case, what many players took as an "all clear" signal to buy proved to be a better time to sell.

Headed for the Exits

"We had a nice run, and clients

with profitable trades are not going to stick around try and hit home runs and potentially lose those gains," said Bryan Piskorowski, market analyst at Prudential Securities. "People are playing it more closely to the vest. Have that as the psychological backdrop, when you see the data

Friday, it makes sense why the market is coming back."

Friday's data featured a weaker-than-expected 1.6% advance first-quarter gross domestic product report. Consensus expectations were for GDP growth of 2.3%, estimates that Piskorowski noted had risen from around 2% in recent weeks. "We set ourselves up for failure with the GDP" report, he said.

Expectations aside, the guts of the GDP report offered some troubling signs, most notably a 4.2% decline in nonresidential (i.e., business) investment and a 4% decline in business investment in equipment and software. The former had risen in the fourth quarter and the latter for three consecutive quarters prior to this setback.

"The severity of the contraction in first-quarter business investment spending was a surprise," said John Lonski, chief economist at Moody's. "The economy remains quite uninspiring."

The bulk of the weekly data supported that view, including a second-straight monthly drop in the index of leading economic indicators on Monday, a lackluster Beige Book report Wednesday, the highest level of weekly jobless claims in a year on Thursday, and a 5.6% drop in existing-home sales on Friday. Also, the Economic Cycle Research Institute reported Friday that its weekly leading index fell to 119.1 from 119.4 the prior week, while the four-week moving average fell to negative 0.1% from positive 0.4%.

Partially reflecting the data's negative slant, the Dow fell 1.6% Friday while the S&P 500 lost 1.4% -- ending below the 900 threshold, and the Comp shed 1.6%. Other issues weighing on shares included North Korea's declaration of its nuclear capabilities, rising concern about SARS and warnings from firms such as


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R.J. Reynolds




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Additionally, Salomon Smith Barney downgraded the chip sector, and that helped push the Philadelphia Stock Exchange Semiconductor Index down 5%.

As stocks fell late in the week, Treasuries rallied. Further buoyed by disappointing economic news, the yield on the benchmark 10-year note fell 8 basis points this week, to 3.88%.

Eye of the Beholder

Despite punk first-quarter GDP and other data, Lonski believes recent reports "understate the current pace of economic activity." Retail sales rebounded in March, and Thursday's surprisingly strong durable goods report showed that new orders for nondefense capital goods, excluding aircraft, are "in pretty good shape," he noted. (Other upbeat data included Friday's new-home sales report and the University of Michigan's consumer confidence survey.)

Furthermore, there's a mind-set among some participants (and economists) that all first-quarter data are irrelevant because of war- and weather-related distortions. Optimists believe the economy is on the cusp of robust growth now that "geopolitical uncertainties" have been removed, at least as they pertain to Iraq. The sharp decline in oil prices from the March highs near $40 -- crude futures ended Friday at $26.26 -- is a major factor in this bullish view.

But "the pace of economic activity will probably remain lackluster -- below trend growth of about 3.5% -- through the entirety of 2003," according to Lonski. (While not wildly bearish on the economy -- see above -- he's not terribly bullish either.)

Trouble is, "the equity market is still plagued by valuation problems," he continued. "In order to justify paying so much for corporate earnings, you need firm evidence of relatively brisk economic activity."

In addition to the aforementioned Salomon chip downgrade, the valuation issue surfaced in Banc of America's downgrade of


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Friday, when the stock fell 2.9%.

Valuation concerns arose elsewhere, notably in regard to biotech and Internet names such as




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. (Beyond those bigger-caps, there was chatter about more speculative plays such as

AVI BioPharma




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, which sported big gains at various points during the week, although AVI was getting in after-hours trading Friday.)

Late Friday, Prudential's Piskorowski described the market as being in "no man's land." The "haves" believe that a second-half recovery is imminent and that investors must position themselves for it now, he said. Conversely, the "have nots" are awaiting confirmation from the economy and fretting about valuations.

While "moderately constructive" about shares, the analyst conceded the "air of complacency is a bit of a worry." Both the CBOE Market Volatility Index and its Nasdaq counterpart continued to plummet this week and rose only fractionally Friday. (This column took a more extensive look at sentiment


All those factors -- valuation, sentiment, the economy's outlook, SARS, geopolitics, etc. -- combined to keep most market players off balance and major averages from venturing very far this week.

For better or worse, traders will "come back Monday and do it all over again," as Piskorowksi said.

As usual, we'll be along for the ride.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.