What a Week: Bulls Run

Observers see stocks in a sweet spot -- not a bubble.
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"Buy the dips" aptly describes the stock market's message this holiday-shortened week.

The dips were fleeting on the path to the

S&P 500

setting its first record since March 2000 and the

Dow Jones Industrial Average

hitting its 26th of 2007. This was particularly true on Wednesday, when early weakness linked to a China selloff was wiped out by aggressive afternoon buying after the release of the minutes of the

Federal Reserve's

May 9 policy meeting.

Largely on the basis of Wednesday's rise, the Dow rose 1% this week while the S&P 500 gained 1.3% and the

Nasdaq Composite

rose 2.3%, its best week since late March.

On Friday, the S&P rose 0.4% to 1536.34, its third straight record close, while the Dow gained 0.3% to 13,667.95 -- a record after setting an all-time intraday best of 13,692. The Nasdaq rose 0.4% to 2613.92, far from its March 2000 record but a 6 1/2-year high.

Friday's gains came in the wake of stronger-than-expected reports on non-farm payrolls and ISM manufacturing, as well as a dip in the year-over-year rate in the core personal consumption expenditures index.

Also buoying stocks Friday was a positive reaction to


(DELL) - Get Report

earnings and planned cutbacks, as well as news that the Bancroft family is willing to discuss

News Corp.'s

(NWS) - Get Report

$60-per-share offer for

Dow Jones



Dow Jones jumped 15%, and merger activity -- highlighted this week by


(WB) - Get Report

bid for

A.G. Edwards

(AGE) - Get Report

, a raised offer for

ABN Amro


, and private equity takeouts of






-- continued to support stocks by removing supply and spurring speculation of more deals to come.

Share buybacks such as those announced this week by


(IBM) - Get Report



(WMT) - Get Report

are also reducing the supply of stock, a bullish development even if demand remains stagnant.

But the big story this week was the heavy stream of data, which prompted major reassessments of the outlook for the economy and Fed policy.

"Overall, the tempo and tenor of what is undoubtedly the single-largest

weekly release of data for the year was that the economy is poised to rebound in the second quarter and re-launch in the second half of the year," says Joseph Brusuelas, chief U.S. economist at IDEAglobal.

Traders mainly took a positive spin on Wednesday's FOMC minutes, which reiterated the central bank's concern about "uncomfortably high" inflation. But the Fed also acknowledged that housing "will continue to weigh heavily on economic activity for longer than previously expected," which some took as a precursor to a rate cut.

But rate-cut odds diminished considerably after Thursday's weaker-than-expected first-quarter revision to GDP contained signs of underlying economic vibrancy. The 0.6% growth was the slowest since 2002, but declining inventories, a lesser drag from housing and an upward revision to consumer spending spurred many economists to raise the growth forecasts for the remainder of the year.

Such revisions were further encouraged by Thursday's strong Chicago PMI report and then Friday's slate of data.

In conjunction, odds of a rate cut anytime in 2007 were slashed to 16% Friday, down from 48% a week ago and 100% a month ago, according to Miller Tabak.

While the stock market successfully handled the downshift in rate-cut expectations, the Treasury market did not. On Friday, the benchmark 10-year note fell 12/32, its yield rising to 4.94%, reaching its highest level in more than nine months. The entire Treasury yield curve moved higher as well as fixed-income traders continued to unwind prior bets on multiple rate cuts this year.

"The fixed-income market got way out ahead of itself," Brusuelas says on

my podcast Friday. "I'd hate to be

Pimco's Bill Gross or the guys at Goldman

Sachs," among the most prominent bond investors advocating for Fed rate cuts for several months now. "It's going to be painful for them," the economist says. "That's the price you pay when you get way out ahead of the market."

Mysterious Distance Between Bull and Bubble

Heading into the weekend, many believe it is the stock market that has "gotten ahead of itself." Some are even using the dreaded "B-word" to describe a rally that has seen the Dow rise about 85%, the S&P 92% and the Nasdaq 108% since the last bear market bottomed in March 2003. Broader proxies such as the Russell 2000 have fared even better, and, save for the Nasdaq, each of those averages has hit an all-time high in just the past few days.

But "we don't think there's a bubble. There's a bull market. We need to make the distinction," Mark Keller, CIO of Gallatin Asset Management, said on

TheStreet.com TV earlier this week. "Bubbles develop when novice capital starts to speculate -- we're not seeing that."

Keller, whose firm manages over $9 billion in assets, was speaking specifically about private equity -- about whose activity he said "doesn't get this strong unless valuations are inexpensive" -- but his comments apply to the broader market as well.

If "novice capital" comes from individual investors, they remain highly skeptical; the American Association of Individual Investors' poll showed bearish sentiment rising to 44.8% as of May 30 from 38.6% the prior week, while bullish sentiment fell to 33.3% from 37.4%. Meanwhile, U.S. equity funds, including ETFs, suffered outflows of $4.35 billion for the week ended May 30, according to AMG Data. Excluding ETFs, domestic equity funds had net outflows of $256 million.

One criticism of ETFs is they have become the playground of hedge funds and other fast-money players. The fact so much of the outflow was linked to ETFs suggests "hedges are being unwound," says Robert Adler, president of AMG. "But we don't know which way they started."

Even after stripping out ETF activity, "it would be a stretch to infer retail demand for mutual funds is pushing

equity prices up -- it's something else," Adler says.

After this week that something else could be renewed optimism about the U.S. economy, ample liquidity, robust M&A and buyback activity, or a combination thereof.

Or it could be that it's simply a bull market, which continues to reward the dip-buyers and defy the skeptics.

Aaron L. Task is editor at large of 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 appreciates your feedback;

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