The countervailing forces of price momentum and poor fundamentals battled to a veritable standstill this week, but momentum ultimately prevailed.

Major stock proxies actually fell three of the five sessions this week, reflecting rising consternation about the rally's sustainability. But the market displayed more oomph on its two up days, a bullish trend reflecting continued consternation among market participants that they may miss the "next" up move.

For the week, the Dow Jones Industrial Average rose 0.9%, the S&P 500 gained 1.2% and the Nasdaq Composite climbed 1.1%.

As stocks slogged along, the real excitement was in Treasury market, where yields on the benchmark 10-year note fell to their lowest level since 1958 and yields on the 30-year hit the lowest levels since the bond was first regularly issued in the early 1970s. Treasuries rallied again Friday with the price of 10-year note rising 20/32 to 101 14/32, its yield falling to 3.45%, down 23 basis points for the week. The 30-year bond fell 22 basis points for the week, ending Friday at 4.45%. (Long-dated treasuries enjoyed their best two-week gains since June 1995, Bloomberg reported.)

The Treasury rally continued the momentum sparked last week when the Federal Open Market Committee expressed concern about an "unwelcome substantial fall in inflation." On Friday, Vice Chairman Roger Ferguson said the Fed "has to guard against further declines from the already low prevailing level of inflation," and stressed that it will.

Ferguson also said "the U.S. has too many good things going for it to make a forecast of deflation credible," but such fears were stoked this week by a steep drop in the producer price index on Thursday and Friday's consumer price index report. CPI fell 0.3% in April, a bit more than consensus estimates and the largest drop in 19 months.

"The latest inflation indexes bear out the Fed's concern," Goldman Sachs' economists commented. "With activity data also indicating that the postwar rebound is still more forecast than fact, the probability of a 50-basis-point rate cut by midyear has risen further."

Also Friday, the government said housing starts fell 6.8% in April to a lower-than-expected annual rate of 1.63 million units, although a stronger-than-expected consumer confidence report from the University of Michigan was somewhat of a mitigating factor.

Friday's consumer confidence data were similar to Thursday's Empire State Manufacturing Index, a sliver of positivism compared with a larger pie of negativism.

In addition to the PPI's biggest monthly drop in history, Thursday's data included a 0.5% drop in industrial production while capacity utilization fell to its lowest level since 1983. (Nevertheless, shares rallied Thursday and the S&P 500 established its highest close since Aug. 26, although it failed to surpass its intraday high of 954.32, established Dec. 2.)

The week also brought a wider-than-expected trade deficit and weaker-than-expected retail sales, along with cautionary "micro" news from firms such as Applied Materials ( AMAT), Target ( TGT) and General Motors ( GM ).

"Taken together, the hints of improvement are quite small compared to uncertainties the U.S. economy still faces," said John Lonski, senior economist at Moody's Investors Service. "The economy might not be sinking, but there's nothing out there to indicate economic performance will be anything better than stagnation."

The Economic Cycle Research Institute offered a very similar outlook Friday, even after its weekly leading index rose for a third straight week, to 122.4 for the week of May 9 from 121.9 the prior week. The index's four-week moving average rose to 2.1% from 0.9%.

"A double-dip recession is quite clearly not likely, but its absence doesn't herald anything beyond sub-par growth," ECRI research director (and RealMoney.com contributor) Anirvan Banerji said in a statement.

The Treasury market certainly reflected the punk economic data -- as well as artificial stimuli to prices -- although it didn't pay much heed to the rebound in crude prices, which rose above $29 this week. Higher crude prices, along with renewed strength in gold -- up 2% to $354.90 this week -- would seem to undermine now-rampant fears of deflation. But most equity and fixed-income traders seemed to ignore developments in commodities, as well as renewed weakness in the dollar, notably on Friday.

Carry On, Wayward Stocks

Due either to ignorance of the data or blind faith in the Fed's healing powers (mind-boggling given what's transpired in recent years), stock traders seem mainly undisturbed by the week's economic news. Yes, major averages stutter-stepped this week, but that was more a function of technical resistance -- notably between 950 and 965 for the S&P -- vs. widespread fundamental concerns about the much-ballyhooed second-half recovery failing to materialize.

This brings us to the always contentious issue of sentiment. Anecdotally, there continues to be a great amount of pessimism about the rally's staying power among readers, be it because of the aforementioned economic lethargy, valuations or simply the speed of the market's recent move.

Such concern, albeit to a lesser degree, was reflected in Chartcraft.com's latest Investors Intelligence survey, which showed bullishness falling to 54.4% from 55.8% the prior week. Bearish sentiment also fell, however, to 23.9% from 24.4%.

On the other hand, the CBOE Nasdaq Volatility Index this week fell to its lowest level since July 1998 while the VIX slid to its lowest level in a year and the put/call ratio fell to 0.54 on Friday. As of Thursday, bullish sentiment in the American Association of Individual Investors' survey was up to 62.8%, a 10% rise from the prior week and up from under 49% on May 1.

Reflecting individuals' renewed enthusiasm for shares, equity mutual funds enjoyed inflows of $14 billion in April, according to Lipper, the largest monthly inflow since April 2002.

Another sign of optimism is the ongoing strength in Internet leaders such as eBay ( EBAY), biotech plays such as Millennium Pharmaceuticals ( MLNM), and numerous small-cap stocks, which have been producing some astounding percentage gains.

But one person's paper profits are another's sign of rampant speculation and both camps had plenty of fodder this week.

Tune-In TaskMaster

I'll be back on WABC radio's Batchelor & Alexander show Friday evening, around 9:30 p.m. PDT/12:35 a.m. EDT. (OK, that's really Saturday morning for East Coasters.) The show is nationally syndicated, so check wabcradio.com for local listings or Webcast options.
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.