Stock proxies stumbled for a second consecutive week, raising doubt about whether the market's traditional seasonal strength will arrive this year.

For the week, the Dow Jones Industrial Average and the S&P 500 each fell 2.5% while the Nasdaq Composite lost 4.2%.

As was the case Thursday, when a better-than-expected retail sales report failed to inspire buyers, shares stumbled Friday despite a higher-than-expected University of Michigan consumer confidence index.

Both reports were "not inconsistent with the economy working its way through its current soft spot," to borrow from the Federal Open Market Committee's statement on Tuesday, when the Fed left rates unchanged, as expected. But neither were the data enough to encourage traders to take aggressive long positions. (A drop in wholesale inventories on Monday and higher-than-expected weekly jobless claims on Wednesday were offsetting negatives.)

On Friday, the Dow fell 1.2% to 8433.85, the S&P 500 shed 1.3% to 889.50 and the Comp lost 1362.60. The session left proxies below some key short-term technical levels, namely Monday's intraday lows of Dow 8473, S&P 892 and 1367 for the Comp.

A major feature of the week was lackluster trading. Volume did not exceed 1.3 billion shares on the New York Stock Exchange any day this week, nor since Dec. 2, to be specific. Volume has similarly deteriorated in Nasdaq trading.

Trading activity bordering on soporific has optimists hopeful. Activity drying up on the downside means major averages are biding time before another move higher, they claim. Skeptics, of course, contend the now two-week backslide is a harbinger of more losses, and volume will increase as more market players cop to that inevitability.

Meanwhile, some believe the myopia about stock proxies is obscuring the "real story," or at least, some money-making opportunities.

"I'm getting bored talking about these major market averages and waiting and watching the endless churn in a seemingly ever-narrowing range," observed Scott Bleier, founder of HybridInvestors.com. "Something will give soon, but we should be focusing on what is working, even if it won't give us the kind of move like we just enjoyed in the small-cap, beaten-down tech stocks."

Specifically, Bleier mentioned the "low growth, big cash flow, boring, unsexy value oriented stocks," such as utilities. For the week, the Dow Jones Utility Average rose 5.1%.

Such strength is classically a sign of investor concern about the economy, which remains high. But prospects for dividend tax reform also could be a factor in the most recent run-up.

Meanwhile, most traders continue to focus on tech shares, particularly semiconductors. Chips tumbled Friday following negative comments by J.P. Morgan and Deutsche Bank, and in the wake of cautious comments Tuesday evening by Intel ( INTC) Chairman Andy Grove. The Philadelphia Stock Exchange Semiconductor Index fell 3.7% Friday and 6.7% for the week.

Politics, Geopolitics and Commodities

The week was much more exciting, and rewarding, for those long commodities and related shares.

Within energy, oil benefited from ongoing concerns about potential war with Iraq, the political unrest in Venezuela, and OPEC's decision to cut production. The price of crude oil rose 5.6% for the week to $28.44, while the Philadelphia Stock Exchange Oil Service Index gained 0.6%.

Natural gas jumped 20.5% for the week to $5.284 per million btu, and to its highest level since April 2001 after the government reported a steep drop in storage levels following last week's cold snap. The Amex Natural Gas Index rose 4.7% for the week.

Precious metals, meanwhile, rallied due to a confluence of events, including geopolitical concerns and weakness in the dollar, prompted by a shake-up in the Bush administration's economics team.

This week, President Bush nominated CSX ( CSX) Chairman John Snow to replace outgoing Treasury Secretary Paul O'Neill; former NYSE chairman William Donaldson to head the Securities and Exchange Commission; and former Goldman Sachs co-chairman Stephen Friedman to lead the White House's National Economic Council.

The reaction by equities to the political news was tepid, at best. But the dollar suffered a definitely negative reaction amid a sense the new team will promote a budget-busting economic-stimulus package.

"They will give lip service to a strong dollar because that's politically what you have to do, but the reality is the impact of the twin deficits are very negative for the dollar," said Mark Johnson, manager of the $112 million ( USAGX) USAA Precious Metals and Minerals Fund , which is up 57.2% year to date. "The dynamics favor a weaker dollar and a stronger gold price largely because of the twin deficits."

Indeed, gold rose 2.5% for the week to $333.80 per ounce, its highest level since October 1999. Silver also broke out, and the Philadelphia Stock Exchange Gold and Silver Index rose 8.2% for the week. Meanwhile, the dollar approached its lowest level vs. the euro since January 2000 this week, while the U.S. Dollar Index fell 1.3% to 103.97.

The "twins" Johnson referred to are the current account deficit and the federal budget deficit. The former narrowed marginally to $127 billion in the third quarter but remains historically high, the Commerce Department reported this week. The latter was $114 billion in the first two months of fiscal 2003 vs. $62 billion in the same period last year, the Congressional Budget Office reported.

Goldman Sachs chief economist William Dudley observed Thursday that "the outlook is for $200-plus billion federal deficits through the end of the decade," after incorporating "reasonable estimates" of spending growth, and the cost of making permanent the Bush tax cuts and other tax reforms. Meanwhile, the "the situation deteriorates sharply after" 2010 as baby boomers begin to retire in earnest, Dudley added.

From Johnson's point of view, the double deficits are bad for the dollar. And what's bad for the greenback is good for gold, he surmised. "The inverse correlation between gold and the dollar is sometimes weak and sometimes strong, but it's there."

Friday's much weaker-than-expected Producer Price Index report for November -- PPI fell 0.4% while the core fell 0.3% vs. expectations for flat readings for both -- did undermine nascent concerns about inflation and thus a bullish argument for gold, the fund manager conceded. "However, the PPI data is arguably indicative of a continued weak economy, which would argue for less direct investment on the part of foreigners, which argues again for a weaker dollar" and is thus bullish for gold.

Commerce also reported this week that foreign direct investment in the U.S. rose to $11 billion in the third quarter vs. outflows of $2.7 billion in the second. Also, foreigners bought $54.7 billion of Treasury notes, the second-highest quarter ever, although their purchases of stock fell to $7.4 billion, down 35% from the second quarter.

It is an article of faith among gold bulls and equity bears (often mutually inclusive) that weakness in the dollar will curtail foreign investment in the U.S., which will exacerbate deficits, spurring further weakness in the dollar, continuing a downward spiral.

Such fears have largely proven unfounded to date, and all investors should pay heed to whether this week's trends to the contrary persist and intensify.
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.