What a Week: Hard Climb

Stocks move stubbornly to new highs amid a host of good news.
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A new 2005 high on the

Nasdaq

and a four-year high on the

S&P 500

is how Wall Street celebrated a week of positive tech earnings, cooling oil prices, strong economic data and tame inflation.

Despite the gains, reservations were visible by Thursday. While the major averages rose, fewer stocks took part in the gains, and small-cap indices were left behind altogether after peaking Tuesday. The S&P 600 small-cap index lost 1.5% between Wednesday and Friday.

With crude oil losing its weather-related premium -- it fell $1.43 to $58.20 a barrel on the week -- the market benefited, but energy shares took some of the wind out of the broader indices, especially the S&P 500.

That didn't prevent the index from hoarding the attention by breaching and closing twice above a four-year high of 1225, a level the index didn't hold back in early March. On the week, the S&P 500 rose 1.3% to finish at 1227.92.

"It should be the S&P 500's turn to play now," says Barry Hyman, market strategist at Ehrenkrantz King Nussbaum.

As analysts argued that large-cap stocks are now undervalued relative to small-caps, investors piled back into big names, and headed to (where else?) the technology sector. Positive earnings from

Apple

(AAPL) - Get Report

and

Advanced Micro Devices

(AMD) - Get Report

have investors hoping for more from the likes of

Google

(GOOG) - Get Report

,

Yahoo!

(YHOO)

and

Microsoft

(MSFT) - Get Report

next week.

They also boded well for the Nasdaq, which finished the week at a new high for the year. It gained 2.1% over the five sessions to 2156.78.

The

Dow Jones Industrial Average

, meanwhile, added 1.8% to 10,640.83. The blue-chip average was helped as cyclical stocks made a comeback thanks to a flurry of positive economic news: strong retail sales, a rebound in a New York economic index, upbeat consumer sentiment and, most of all, tame inflation at both the consumer and producer level.

Amid all these positive catalysts, "the market still has a window to move higher for the next two to three weeks," says EKN's Hyman. "But the long side is going to be very crowded. More people are turning bullish by the day."

And bullish investors must hope that earnings don't disappoint next week, because other factors won't necessarily help. Tame inflation news may have some investors daydreaming again that the

Fed

is nearing a pause. Alan Greenspan isn't likely to go along with the scenario.

The Fed chairman delivers semiannual testimony to Congress on Monday. Backed by the latest evidence of strong economic data, he is likely to signal no change in the Fed's plans to continue lifting interest rates in the near future.

Why? While inflation is tame so far, the economy is still growing above trend. Monetary policy is still accommodative, and the fed funds rate, at 3.25%, is still far from a "neutral level." Labor costs are also rising -- though their inflationary impact might not be felt before next year.

In addition, "spare capacity is dwindling, financial conditions remain very easy, and Fed officials will want to minimize the risks emerging in the housing sector," Goldman Sachs economist Andrew Tilton wrote to clients. "We expect the chairman to give no sign that a pause in tightening is imminent."

The bond market, it seems, is incorporating that message, which was previewed by several Fed speakers this week. The price of the benchmark 10-year Treasury bond continued to fall throughout the week, while its yield advanced to 4.17%.

The move out of small-caps -- which, admittedly, have run up to dizzying heights -- could also reflect a reassessment about Fed policy. Historically low interest rates have helped fuel an appetite for smaller companies, which rely more on debt than their big-cap counterparts. As the Fed continues to raise rates, small-caps are more at risk.

And -- if only logic applied -- cyclical stocks should not be doing all that well either. But since markets aren't "rational" most of the time, it might be a good idea to turn to the behavioral finance approach.

Investment guru Woody Dorsey, founder of Market Semiotics, believes that Greenspan's appearance Monday could create some turbulence for stocks. But it shouldn't be enough to derail the market from its current upward trend into the August highs he forecasts.

"The market kind of knows where

Greenspan stands. And the interest rate story is not significantly negative enough to undo the market at this point, especially while earnings are bullish and oil weakness is bullish," Dorsey says.

What he finds interesting, though, is that the market seems overly bullish about its latest move upward, representing a "disconnect" with the relatively choppy trading and small moves it has made. "Slogathon" is how Dorsey describes overall market action this year. The uptrend into the August highs, he says, should only represent 2% to 4% gains on the S&P 500 (the uptrend started after the London bombings last week).

Similarly, Dorsey muses about the newfound hype surrounding "old" big-name high-tech stocks. It's a bit as if "it's new all over again," he says. The market is trying to will some excitement back into an industry that hasn't seen real exciting stuff since Apple's iPod and Google's IPO. And, one might add, tech is just as cyclical as other industries.

A surer bet, given what Dorsey describes as the "global asset grab," is that "no one, including myself, can say oil will go down significantly" this year. The "smart money" may have gotten out of oil for the moment, and easier oil prices "can give a little extra boost for equities," until August.

But the significant downturn in stocks, which Dorsey expects after his predicted August highs, could very well be accompanied by a new surge in oil.

To view Gregg Greenberg's video take on today's market, click here

.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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