What a Week: Prancing Bulls

Stocks shake off all manner of bad news as the 'fourth-quarter rally' gets under way. Can it last?
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There was another

Fed

meeting and another rate hike. There was also another weak jobs report -- this time not due directly to hurricane disruptions but to the post-hurricane spike in energy costs. And after falling below $60 per barrel on Halloween, crude oil prices returned from the graveyard. Bond yields surpassed their March highs.

But the bulls weren't going to let any of this spoil the stock market's party this week. All the fears that led major averages to plunge to five-months lows in October seem to have exhausted sellers, and buyers are now picking up the pieces.

The major stock indices rose in four out of the week's five sessions, and the one down day came Tuesday, after

Dell

(DELL) - Get Report

lowered guidance and traders sold on the widely expected news of another Fed hike -- and a statement signaling more to come.

Tuesday's dip was followed by strong gains on Wednesday after

Time Warner

(TWX)

beat estimates and raised its guidance, and Thursday after

Merck's

(MRK) - Get Report

court victory in the latest Vioxx trial. On Friday, a weaker-than-expected jobs report first served as a trigger for some good old fashioned profit-taking. But by the close, buyers again had the upper hand. The

Dow Jones Industrial Average

rose 8.17 points, or 0.08%, to 10,530.76.

The

S&P 500

advanced a fractional 0.20 points, or 0.02%, to 1220.14. And for what it's worth, the modest gain in the broad index was accomplished in spite of weakness in energy shares, which followed crude's path. The

Amex Oil Index

fell 2.7%.

Valero

(VLO) - Get Report

,

Marathon Oil

(MRO) - Get Report

and

ConocoPhillips

(COP) - Get Report

were leading the downside.

The tech-heavy

Nasdaq Composite

outperformed Friday, rising 9.21 points, or 0.43%, to 2169.43. Shares of

Expedia

(EXPE) - Get Report

surged nearly 10% after the online travel specialist's earnings beat estimates.

For the week, the gains were more impressive and validated last week's turbulent but upward momentum. The Dow advanced 1.2%, the S&P rose 1.8%, and the Nasdaq climbed 3.8%.

The week's action was certainly upbeat, but is it enough to turn dreams of a fourth-quarter rally into reality?

There's no doubt, the market is climbing out of the hole it dug in October, when the major indices plunged to five-months lows. By Friday's close, the S&P has rallied 3.6% from its Oct. 20 of 1177, the Nasdaq has advanced 6.5% from its Oct. 12 low of 2037, and the Dow has risen 3.1%.

Market strategists who'd been

predicting the bounce, such as Cantor Fitzgerald's Marc Pado, are satisfied that the market did as they expected by breaking through a number of technical hurdles; most notably, the S&P broke above its 200-day moving average of 1200. But Pado's optimism remains contained.

"The technical bounce from the October lows has taken place, and that's nice," Pado says. "Now comes the hard part, the real test of faith. To get a sustainable trend going forward, we're going to need more positive catalysts."

After overlooking all the negatives this week, the market will need new leadership to continue moving higher. Pado hopes this leadership can come from retailing stocks, which have been in the eye of the storm of recent concerns about the resilience of consumers to surging energy costs.

On that note, the S&P Retail Index surged 4.6% this week as lower gasoline and natural gas prices (amid a warmer-than-usual fall season in the U.S.) are abating fears of a consumption meltdown this winter. On Thursday, chain-store sales showed strength.

But as noted

here, the broad market's real leadership over the past two weeks was found in energy shares. The Amex Oil Index, despite falling 2.7% on Friday, is still up 2.8% for the week. The energy sector's revival from the October lows took place even though crude oil prices have fallen back to test the $60-per-barrel level.

Energy shares will also need a catalyst to continue moving higher, and that catalyst could also be a resilient consumer ensuring that economic growth -- and energy demand -- will continue.

As we head into the holiday shopping and winter heating season, the interplay of these two sectors will be key to determine whether the market's newfound momentum can last.

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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