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What a Week: Nothing but Green

The major indices are up three straight weeks and eight straight months.

A steady stream of upbeat economic news kept stocks in rally mode this week, capping a month of gains for the major averages.

The

Dow Jones Industrial Average

closed up 0.7% for the week to 9416, and the

Nasdaq

rose 2.5% to end at 1810. The

S&P 500

gained 1.5% to finish at 1,008.

The major market barometers have risen for three straight weeks and are up nicely for the month of August. That's particularly impressive, because August is usually considered a dismal month for stocks, as investors anticipate weakness from tax-loss selling and quarter-end portfolio rebalancing in September.

The stock averages have now posted gains for six consecutive months, something that hasn't been accomplished in eight years.

Volume was noticeably light this week with many traders on vacation, and price swings were extremely small. From a technical perspective, the market held up reasonably well, with the S&P 500 holding above the 1000 level and the Nasdaq closing above 1800 for the first time in more than 16 months. But some analysts are getting concerned about the indiscriminate nature of the buying over the past few months.

The 50 stocks in the S&P 500 with no earnings or the highest price-to-earnings ratios last year are up an average of 44.3% so far this year, according to Merrill Lynch economist David Rosenberg. The 50 stocks with the lowest P/Es, by comparison, are up just 9.5%.

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"Even so, it does still attest to the breadth of the market advance," he said, noting that 462 S&P 500 stocks are up since the end of February.

Stocks began the week on a slight down note, as concerns abut valuations prompted some investors to take money off the table despite some positive research on the technology sector and a good economic report. Existing-home sales rose to an annualized pace of 6.12 million in July, ahead of economists' estimates and the third increase in the last four months.

Another round of positive economic news brought mild gains on Tuesday, however. Durable goods orders rose 1% in July, in line with estimates, and consumer confidence rose in August after falling in July. Although new-home sales fell in July from record levels, they were still ahead of economists' expectations and weekly chain-store sales edged higher as a result of federal tax cuts.

The Congressional Budget Office, which forecast a federal deficit of $401 billion this year, had little impact on the market.

On Wednesday, a dearth of news left stocks narrowly mixed but the market picked up steam on Thursday, helped by more encouraging data. Gross domestic product rose at a 3.1% annualized pace in the second quarter, up from its initial estimate of 2.4% and well above the first quarter's 1.4% growth rate. Still, jobless claims increased by 3,000 in the latest week and the four-week average also edged up.

A sharp increase in the Chicago purchasing managers index for August and big rise in personal spending added to the upbeat tone on Friday, although the University of Michigan's consumer sentiment index for August fell slightly from the earlier estimate. Meanwhile, in a speech before the

Federal Reserve

Bank of Kansas City,

Fed

Chairman Alan Greenspan rejected the idea of targeting inflation, saying that rule-based monetary policy is too rigid and wouldn't necessarily bolster economic growth.

"From the looks of it, we are experiencing a nascent recovery," said Seth Scholar, senior research analyst with Sand Hill Advisors. "However, it's too soon to say whether the downward trending of the bond market is going to weaken the tentative recovery we're seeing now."

The yield on the 10-year Treasury note fell slightly this week in reaction to positive economic news. A stronger economy typically leads to inflation, which eats away at interest payments on fixed-income securities. For the month, the 10-year yield has climbed 5 basis points. That's the fifth rise in the past six months.

Scholar said investors should pick stocks carefully as the situation unfolds. "Keep an eye on companies that are growing at a reasonable price and are competitively well-positioned," he said. "Organizations that have used the downturn to improve their cost structure and have high quality of earnings are a focus right now."