In the microcosm of one session, Thursday was an example of what has happened in the market in the period from last October's lows, from the beginning of the year and since the March lows: The Nasdaq Composite performed best, trailed by the S&P 500, with the Dow Jones Industrial Average lagging furthest behind.

For the second day running, major averages were unable to sustain a midmorning peak. The afternoon weakness proved most pronounced for the Dow, which finished down 0.9% to 8711.18 after trading as high as 8862.58 and as low as 8679.60. The S&P 500 ended off 0.4% to 949.64 vs. its intraday high of 962.08. The Nasdaq fell from its apex of 1591.30 but closed up 0.7% to 1574.95.

Big Board volume approached 1.7 billion shares, the highest this week and a bit disconcerting (to bulls), given the Dow's performance. At about 2.2 billion shares, Nasdaq trading exceeded 2 billion shares for a second straight day.

Weakness in 3M ( MMM), Caterpillar ( CAT) and rumors of accounting concerns at American Express ( AXP) weighed most heavily on the blue-chip index, which may have a period of negative performance to follow its recent underperformance.

"All of our intermediate-term indicators suggest we're still in the early stages of a substantial uptrend for small- and mid-cap stocks," said Paul Desmond, president of Lowry's Reports. But "short term, we're getting some divergences that make us feel we're headed toward a correction bigger than any to date in this uptrend, and big-caps could get hit hard," perhaps by 10% to 12%.

Those divergences include the Dow being unable to get above its January highs even as other major averages surpassed theirs. Meanwhile, Lowry's measure of mid-cap stocks "has blown through" its comparable level, Desmond said. "Perhaps we'll see big-cap stocks run into real resistance, but I don't see any for small- and mid-caps" on the Big Board. The same holds for the Nasdaq, he continued, suggesting that "big-cap tech names are acting sluggish, whereas smaller-caps are acting strong."

Strength in Cisco ( CSCO) and Intel ( INTC) on Thursday suggested to some that pattern might be breaking. But Microsoft ( MSFT) retreated fractionally, and Oracle ( ORCL) lost 3.2% among other over-the-counter heavyweights.

To reiterate, Desmond -- who turned optimistic on stocks in March, as reported here -- believes the rising tide remains intact, even if some squalls are approaching (hitting the Dow's hull Thursday).

On Wednesday, Lowry's buying-power index hit a new high in the postwar rally, while its selling pressure index is at a two-year low. "Those indices are saying demand is increasing and the supply of stocks for sale is decreasing," he said. "That's the most bullish period you can find."

Having said that, "people should not be getting complacent about it being a bull market," the technician stressed. "We think we're still in the early stages, but it's a selective uptrend."

The selectivity was glaringly evident Thursday and focused on small-caps such as Corvis ( CORV) and larger names such as Hovnanian ( HOV), the latest homebuilder to post blowout quarterly results. Hovnanian rose 6%, but in a notable divergence, the S&P Homebuilding Index fell 1.2% to 494.52 after trading as high as 514.11 intraday.

Recent leadership in biotech also faltered, with the Amex Biotech Index slipping 2.2%. The Philadelphia Stock Exchange Semiconductor Index rose 3.1% to 375.34 behind strength in names such as Novellus ( NVLS). (Novellus dropped after hours after saying SARS was hurting business.)

There weren't any obvious fundamental developments to explain what turned major averages back Thursday, although none are necessary, given the market's technically overextended posture. Stock proxies hit their session highs after the release of the morning's economic data, which included an upward revision to first-quarter GDP and a drop in weekly jobless claims, albeit less of a drop than economists forecast.

Although the data were initially cheered by most equity traders, the price of the benchmark 10-year note rose 22/32 to 102 12/32. The 10-year's yield fell to 3.34%, suggesting that fixed-income traders aren't yet convinced economic recovery is imminent.

Dollar Daze

One possible explanation for the Dow's lethargy was the dollar's continued stabilization, which began midday Tuesday. The greenback ended off session highs, but its recent whipping appears to have ended. In late New York trading, the euro was at $1.1884 vs. $1.1827 Wednesday, while the dollar was at 118.29 yen, up from 117.29.

If a weaker dollar contributed to the stock market's recent rally, logic dictates a stronger currency could forestall further gains, at least among the big multinationals that compose the Dow and S&P 500.

A "multimonth rally" in the dollar from its oversold condition is the forecast of Steve Hochberg, chief market analyst at Elliott Wave International in Atlanta. A "large bear market bounce" by the greenback would coincide with -- if not trigger -- a sharp reversal in equity prices, he suggested.

Jay Bryson, chief global economist at Wachovia, offered a more conventional view on the greenback in a conference call Thursday morning.

In sum, "the dollar's depreciation reflects weaker capital inflows" from foreigners, now insufficient to offset the U.S. current account deficit, Bryson said. Private capital investment by foreigners peaked at around $700 billion in 2001 and is now running about $400 billion, he said, citing data from the Federal Reserve.

Describing "a collapse in direct foreign investment," the economist noted that foreign purchases of U.S. stocks have fallen by 75% since the peak.

The dollar's recent weakness can also be explained a less risk-averse environment since the war, he said, suggesting gains by stocks and high-yield bonds are consistent with this. Finally, the Bush administration has signaled that the dollar's decline "doesn't concern them," Bryson said, especially given that it could provide some economic stimulus heading into the 2004 election. "As long as it's not a rout, that's fine."

Officially, Bryson's forecast is that "every currency will appreciate vs. the dollar" for the foreseeable future, but that the dollar's decline won't rapidly accelerate, i.e., crash. He foresees the euro at $1.24 by the end of 2003 and $1.30 in 2004 while the dollar slips to 115 yen this year and 111 yen next.

Rather than seeing it plummet further, Bryon suggested a bigger risk to his scenario would be a dollar rebound. Potential catalysts include evidence of stronger U.S. growth and/or more aggressive monetary policy abroad, especially in Europe and Canada. A week ahead of the European Central Bank's (ECB) gathering, 50 to 75 basis points of easing is "already priced in," he said, suggesting it will take much more from the ECB to spur the dollar substantially higher.
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.