The stock market's multiweek winning streak came to an end this week as major averages were unable to fully recoup steep losses on Monday. Shares did recover thereafter, notably on Thursday, helping to limit this week's decline.

Monday's big declines, which brought major averages down between 2% and 3%, prompted many skeptics to declare the post-Iraq war rally as over. That view is clearly not unanimous, however, and several stocks showed impressive gains this week, even as the major indexes slipped.

For the week, the Dow Jones Industrial Average fell 0.8%, the S&P 500 shed 1.2%, and the Nasdaq Composite slipped 1.8%. As stock proxies dipped, the week's most dramatic action was in so-called other markets.

Treasuries continued their historic advance this week, thanks largely to Federal Reserve Chairman Alan Greenspan's congressional testimony on Wednesday. While suggesting the risk of deflation is minor, Greenspan said the Fed has "the capability, should that be necessary, of moving long-term rates down and expanding" the money supply in order to fight a downward spiral in prices and economic activity. Market participants interpreted that as a signal the Fed would buy long-dated Treasuries, something discussed here previously.

For the week, the yield on the benchmark 10-year Treasury note fell 11 basis points to 3.34%, completing its biggest three-week slide since January 1988, according to Bloomberg.

It was a relatively light week for economic reports, but the data that were released only further fueled demand for Treasuries. These included a tepid 0.1% rise in the index of leading economic indicators on Monday and a larger-than-expected rise in weekly jobless claims on Thursday. On Friday, the Economic Cycle Research Institute (ECRI) reported its weekly leading index fell to 121.6 from 122.3 the week to May 16. (The index's four-week moving average did rise to 3.2% from 2.2%.)

"Cleary the risk of recession has ebbed, but thus far we are heading back only to a subpar recovery," said Lakshman Achuthan, ECRI managing director, in a statement.

Neither the economic data nor Greenspan's comments helped the beleaguered dollar, which slumped anew this week, particularly vs. the euro. On Friday, the European single currency traded above $1.18 for the first time since Jan. 5, 1999, and was going for $1.183 in late New York trading vs. $1.157 a week ago. (The euro also hit an all-time high against the yen on Friday.)

Some improvement in eurozone data -- notably French household spending and upwardly revised German output -- "supported, but did not cause Friday's move" in the euro, said Lara Rhame, economist at Brown Brothers Harriman. The dollar's weakness is "technically led," she said, although clearly, recent comments by Greenspan and Treasury Secretary John Snow are providing a fundamental rationale for the greenback's slide.

European Union ministers have recently begun making comments about the negative effects of the surging euro -- namely on the competitiveness of eurozone manufacturers -- but "the overall tone remains one of acquiescence," Rhame wrote.

Acceptance of dollar weakness has not been the Bank of Japan's policy, and the central bank's intervention helped the dollar rise to 116.89 yen late Friday from 115.97 yen on May 16.

Weakness in the dollar contributed to renewed strength in gold, as discussed here earlier Friday. The price of gold settled at $368.80 Friday, leaving it up 3.9% for the week.

Open Floodgates, Continued Debate

Recent advances in Treasury prices and (prior to this week) stock proxies at a time of pronounced dollar weakness has generated a lot of conversation, and some consternation. Analyzing the relationships among and between various financial markets is always tricky, but here's an admittedly simplistic evaluation: The Fed is flooding the system with liquidity in a concerted attempt to weaken the dollar and fight deflationary pressures (even if the central bank officially says such threats are minor.) Some of that liquidity is moving into Treasuries, driving interest rates down, providing another boost to housing and, presumably, consumption -- something else the Fed desires. Simultaneously, equity investors are betting the liquidity flood and resulting dollar weakness will generate future economic growth.

Save for business-capital spending, which remains lackluster, recent market activity suggests all is transpiring according to (the Fed's) plan.

"Clearly, the Fed is trying to jump-start this economy, and it is not unusual, early in a reliquification cycle, for both bonds and stocks to move in the same direction," said Dave Hunter, chief market strategist at Kelley & Christensen. "The important question is not why are both markets moving up but rather: When will the Fed take away the punch bowl?"

Greenspan gave no indication this week that he's going to ruin the party anytime soon. Congressional approval of a $350 billion package, including cuts in the tax rates on both dividends and capital gains, sent another message to investors this week that the government is trying to facilitate short-term growth despite the longer-term risks of a weak currency and rising budget deficits.

Whether all this "ends badly" remains the subject of intense debate. Meanwhile, traders and speculators are focused on sessions like the one on Thursday, and big gains posted by shares such as biotech's Genentech ( DNA), homebuilders such as KB Home ( KBH), tobacco makers such as Altria ( MO), and rumored takeover candidates such as Idec Pharmaceuticals ( IDPH), AT&T Wireless ( AWE), and Overture Services ( OVER).

The gains may prove fleeting, especially if rumored mergers don't materialize, but traders are fixated on the upside possibilities rather than the downside risks, as evinced by the recent spike in bullishness in's Investors' Intelligence survey, persistent declines in the VIX and its Nasdaq counterpart, and now 10-straight weeks of inflows into equity mutual funds, according to Banc of America Securities.

The bears gripe that the economy remains punk, valuations and optimism too high, and that the stock market is running on fumes. "Trading around holidays tends to be positive, but I don't think we're starting another up leg," Steve Hochberg, chief market analyst at Elliott Wave International in Atlanta, said amid Thursday's advance. "There's a very high possibility the rally ended at last week's highs " of 8766 for the Dow, 948.65 for the S&P and 1533 for the Comp. Monday's sharp setback "means the upward move is over."

Maybe so, but the animal spirits are alive on Wall Street, even if major averages didn't show it this week.

Tune-In TaskMaster

What better way to start your holiday weekend -- U.S. financial markets are closed Monday in observance of Memorial Day -- than by tuning into WABC radio's "Batchelor & Alexander" show. I'll be back on tonight, around 9:30 p.m. PDT/12:35 a.m. EDT (i.e. Saturday morning for East Coasters.)

The show is nationally syndicated, so check for local listings or Webcast options. Oh, and enjoy the weekend.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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