War fever caused a frenzy on Wall Street this week.

Defying those who thought the war rally had occurred before the actual event, stock proxies extended their prewar buildup following the outbreak of hostilities on Wednesday. Furthermore, the performance of shares late in the week mirrored the increasing intensity of the fighting. The dollar rose in tandem with equities, while prices of U.S. Treasuries, gold and oil all tumbled.

In sum, it was a watershed week as myriad markets reacted dramatically to the start and early success of Operation Iraqi Freedom.

"Very often it pays to be contra to the consensus point of view," which was that the onset of war would spur a rally, commented John Roque, the oft-skeptical senior analyst at Natexis Bleichroeder and occasional


contributor. "This time, the consensus got it right and we got it wrong."


Dow Jones Industrial Average

rose 8.4% for the week, its biggest weekly gain since 1982. Meanwhile, the

S&P 500

gained 7.4% and the

Nasdaq Composite

climbed 6%. In currency trading, the U.S. Dollar Index rose 4% to 101.94.

Yields on the benchmark 10-year Treasury rose 52 basis points to 4.10% for the week, the biggest jump since December 2001. Meanwhile, crude futures plummeted 26.7% to $26.91 per barrel and gold shed 6.5% to $326.10 per ounce.

All of those trends -- rising stocks and greenbacks, falling bonds, oil and gold -- accelerated Friday after the much-anticipated "shock and awe" bombing campaign began over Baghdad.

Friday afternoon, almost everything seemed to be going swimmingly from a military perspective, with coalition forces in charge of airfields and reports that Iraqi leaders had lost control and that some were surrendering. Amid rumors of Saddam Hussein's wounding or death, there was speculation his regime might capitulate by Monday. In reaction, the Dow rose 2.8% Friday, while the S&P 500 gained 2.3% and the Comp rallied 1.4%.

In contrast to the action during the long prelude to war, there was little question what was moving markets this week. With a nearly myopic fixation on Iraq, traders pretty much ignored potential market-moving events such as the

Federal Open Market Committee

meeting Tuesday (the Fed left rates unchanged, as expected, and unexpectedly

punted on the risk-assessment statement). Economic data included an 11% drop in February housing starts; another rise in weekly jobless claims; a 0.4% drop in February's index of leading economic indicators; and a larger-than-expected 8-point drop in the Philadelphia Fed's manufacturing index for March.

On Friday, the government reported the Consumer Price Index rose 0.6% in February, bringing its year-over-year increase to 3% vs. a 40-year low of 1.1% in June. Excluding food and energy, the so-called core CPI rose just 0.1% and its year-over-year increase of 1.7% represents a 37-year low, according to Briefing.com.

Meanwhile, the Economic Cycle Research Institute reported Friday its weekly leading U.S. Index fell to a 10-month low of 118.2 for the week ended March 14. The index's six-month growth rate fell to negative 2.2% from negative 1.9% the prior week.

"If something goes wrong

with the war and things get bogged down, we can tip towards more vulnerability, which would lead to recession," commented ECRI Managing Director Lakshman Achuthan.

None of that had much effect on trading, at least not for very long, as very little seemed to be going "wrong" on the war front -- reports of the first coalition causalities and likely civilian losses in Iraq notwithstanding.

Too Much of a 'Good' Thing?

Of course, whenever stocks fare as well as they have in the past nine days, it's natural for some to wonder if they've gone "too far, too fast," particularly given all of the false dawns of the past three years.

Since March 11, the Dow is now up by 13.3%, the S&P 500 by 11.9% and the Comp higher by 11.8%; each is up substantially more from the March 12 intraday lows. But this rally might have further to run, based on gains generated off recent intermediate-term lows.

From their October closing lows, the Dow rose 22.6%, the S&P by over 20% and the Comp by 33.3%. Off their July lows, major averages rose between 15.8% and 20.7%.

There was a lot of talk this week about major averages revisiting their post October 2002 highs of around 9000 for the Dow, 954 for the S&P 500 and 1500 for the Comp. Few think such a move will be uninterrupted, but Rick Bensignor, chief technical analyst at Morgan Stanley, agrees those levels can be achieved, and possibly slightly exceeded in the coming weeks.

"The risks are there because now that you've rallied like this, paying these levels, you have increased risk because if something happens -- a news-driven event -- you could sell off 40 to 50 S&P points," Bensignor said. Still, "you want to use dips to buy" in the wake of this week's action.

"It's amazing what one week can do to change sentiment," the technician said. "For now, the worst is over

and if you get people believing again, all those

dips should be buying opportunities."

Trading volumes have been up -- hitting 1.8 billion shares on the Big Board Friday -- but not overwhelmingly so, suggesting continued hesitancy by some participants.

As reported

here Thursday, mutual fund investors remain wary of wading back into stocks. For the week ended March 19, equity mutual funds took in the first inflows (however modest) since early January. A more pronounced change of heart by retail investors could give the market a secondary boost.

Meanwhile, there's still a "potential stampede by

portfolio managers who were correctly underinvested until last Wednesday," Bensignor commented.

Several sources wondered when financial market participants will start focusing on the potentially long, difficult, and expensive task of rebuilding Iraq's infrastructure as well as governmental institutions. Risks remain in prosecuting the war, which has inflamed anti-American sentiment and, potentially, the risk of further terror attacks. Saddam Hussein or his followers might yet have something unpleasant waiting for coalition forces when they get to Baghdad. Tensions between Turkey and the Kurds, or among other ethnic groups in Iraq, could erupt. Meanwhile, the economy's still sluggish and overcapacity remains a drag on business spending.

Yes, there's a lot that can go "wrong," but for this week, at least, Wall Street was only thinking about what's gone right.

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