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What a Week: The Bad News Bulls Keep Grazing in Tech

Investors took the week's dour news as signs the Fed will cut, and rekindled a love affair with tech stocks.

SAN FRANCISCO -- "It's a bull! It's a bull!" Or so declared the market doctors after stocks, notably of the tech variety, delivered a second straight week of gains. Additionally, some of the earnings news this week wasn't as terrible as some feared, even if it wasn't terribly strong, either.

Only more signs of economic weakness, continued power problems in California plus more warnings and cautious comments from companies in varied industries had the potential to dampen the enthusiasm. But those developments only reconfirmed expectations that more favors will be forthcoming soon from the

Federal Reserve

.

For the week, the

Dow Jones Industrial Average

rose 0.6%, the

S&P 500

rose 1.8% and the

Nasdaq Composite

gained 5.5%.

Market players were in a wait-and-see mode Tuesday when trading resumed after the long holiday weekend. Mainly they were waiting for a slew of earnings and to see how stocks reacted. After a relatively quiet session, the Dow rose 1.2% while the S&P and Nasdaq suffered modest declines. Banking stocks did well despite reports of more problem loans at

Bank of America

(BAC) - Get Bank of America Corp Report

and slowing growth at

Citigroup

(C) - Get Citigroup Inc. Report

.

Unbeknownst to investors focused on the "major" averages, the

Value Line Arithmetic Index

set a record on Tuesday, culminating what some observers have dubbed a "stealth bull market" for the majority of stocks in recent months.

On the economic front, the

Commerce Department

reported another rise in inventories, the latest sign of corporations' struggles to hock their wares.

The earnings barrage Tuesday evening featured results from

Intel

(INTC) - Get Intel Corporation (INTC) Report

, which met expectations but forecast a 15% decline in first-quarter sales. But on Wednesday, investors chose to cheer the fact Intel's results weren't worse, and the stellar reports from newer tech bellwethers such as

Juniper Networks

(JNPR) - Get Juniper Networks, Inc. (JNPR) Report

and

Applied Micro Circuits

(AMCC)

.

Party Like It's... Yep, 1999

Harkening back to the go-go days of yesteryear, momentum favorites raged on the upside early Wednesday, sending the Nasdaq as high as 2756.63. But some of the initial giddiness faded into the close and the index closed up "just" 2.5% at 2682.78. The S&P 500 rose 0.2% but failed to sustain its early gains while the Dow shed 0.6%, weighed down by a profit warning from

3M

(MMM) - Get 3M Company Report

.

Meanwhile, industrial production posted its biggest decline since June 1998, while the

Consumer Price Index

report proved tame. That combination left some observers salivating about the prospect for more Fed easing. Additional indications of economic slowing came from

J.P. Morgan Chase

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

, which posted lower-than-expect results and

General Electric

(GE) - Get General Electric Company (GE) Report

, which reported earnings in line with expectations but warned of "significant" layoffs.

IBM

(IBM) - Get International Business Machines (IBM) Report

led the earnings barrage Wednesday evening, producing

better-than-expected earnings and issuing generally positive guidance. Elsewhere,

i2 Technologies

(ITWO)

demonstrated the risk of trying to

game expectations for companies and individual investors alike.

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Evoking its past glories, IBM rose 12% Thursday and spearheaded another surge for tech stocks in the process. Big Blue's news overshadowed less-than-stellar reports or outright disappointments from the likes of

Apple Computer

(AAPL) - Get Apple Inc. (AAPL) Report

,

AMD

(AMD) - Get Advanced Micro Devices, Inc. Report

,

Extreme Networks

(EXTR) - Get Extreme Networks, Inc. Report

, and

Redback

(RBAK)

. The Nasdaq rose 3.2% to 2768.49, eclipsing what some observers viewed as technical resistance at 2700. Goosed largely by IBM, the Dow rose 0.9% while the S&P 500 gained 1.4%.

The

Philadelphia Fed

survey released Thursday was perhaps the most

dramatic example of another week's worth of data showing the economy in retreat. (Friday's consumer sentiment figures from the

University of Michigan

confirmed the trend, although the trade deficit shrank for the second straight month.)

Thursday evening brought more news perceived to be

positive from

Microsoft

(MSFT) - Get Microsoft Corporation (MSFT) Report

, as well as

BMC Software

(BMCS)

,

Commerce One

(CMRC)

, and

eBay

(EBAY) - Get eBay Inc. Report

.

Reflecting the optimistic mood heading into Friday's session, those results appeared to overshadow the

slower growth outlook from

Sun Microsystems

(SUNW) - Get Sunworks, Inc. Report

.

But the early momentum quickly faded. The Comp managed to climb 0.1% to 2770.38 on Friday, but closed well off its initial high of 2841.25. The S&P 500 shed 0.4% while the Dow lost 0.9%, as an earnings warning from

Home Depot

(HD) - Get Home Depot, Inc. (HD) Report

counterbalanced additional gains by Microsoft and IBM.

Notably, declining stocks bested advancers Friday as reflected by a 0.9% decline for the Value Line Index, which saw its streak of record-setting closes snapped at three.

Don't Stop the Rain

Still, few tears were shed over Friday's dour session. Heading into the weekend, the prevailing sentiment on Wall Street was one of regret: by those lamenting gains lost by selling winners too soon, or those who didn't enter the fray quickly or substantially enough. Pundits

skeptical of tech stocks at the beginning of the year were

acquiescing to the group's power by week's end.

Similarly, I warned investors to be

mindful of the herd, but neglected to note just how powerful a force the herd can be. Despite last year's debacle, tech stocks continue to frolic in the dreams of most investors and the group has clearly regained momentum in the early part of 2001.

The question, of course, is whether the momentum can continue.

"We think that technology outperformance is more possible, although not yet probable," Robert Robbins, chief investment strategist at

Robinson Humphrey

in Atlanta, wrote Friday. "It is very unlikely that technology will again show anywhere close to the overwhelming leadership that it did in the two years prior to the March 2000 high."

Robbins is far from bearish; on Dec. 21, he upgraded stocks to the highest ranking in his methodology and predicted roughly 25% gains for the S&P 500 this year. Furthermore, on Friday he raised the recommended allocation in tech stocks to 25% from 20%. But by upgrading tech to a level still slightly below its weighting in the S&P 500, the strategist acknowledged the group's upside potential while simultaneously seeking to remind investors that diversification is not a dirty word.

But for this week, as with the one prior, investors mainly had eyes for tech.

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.