Stocks erased part of Tuesday's decline thanks to a hoard of positive developments that challenged the conventional wisdom in several markets. The dollar rebounded strongly, gold cratered and interest rates declined, all in contrast to the consensus views going into 2005.

The shifts helped the three major indices finish with gains of 0.5 apiece%. The Dow Jones Industrial Average closed at 10,493.49, the S&P 500 finished at 1182.72m and the Nasdaq Composite, which definitively did not approach its January high on Wednesday as it had the past four days, finished at 2126.1.

Merck ( MRK - Get Report) was the biggest gainer in the Dow, rising almost 3%, as a 2005 profit warning wasn't as bad as some expected.

Retailers and insurers helped the market move up. United HealthGroup ( UNH - Get Report) gained 4%, Cigna ( CI - Get Report) added 3%, Home Depot ( HD - Get Report) rose 2% and Abercrombie & Fitch ( ANF - Get Report) increased 3%.

Aside from the obvious drop in gold shares -- Barrick ( ABX) lost 2%, for example -- base metals and semiconductors were also on the downswing. Nucor ( NUE - Get Report) fell 1%, U.S. Steel ( X - Get Report) dropped 1% and BHP Billiton ( BHP) lost 2%.

Intel ( INTC - Get Report) dropped 2% as did Applied Materials ( AMAT - Get Report), following Texas Instruments' ( TXN - Get Report) weak midquarter update delivered after Tuesday's close. TI lost 4%.

The euro fell to $1.3250 from over $1.34 on Tuesday. Against the yen, the dollar rallied to over 104.4 from under 103. Gold, which typically moves counter to the dollar, dropped $15 an ounce to under $439. Copper, platinum and silver fell sharply as well.

The dollar was helped by a confluence of macro developments including a weak GDP report from Japan that depressed the yen, plus renewed comments by European bankers threatening to intervene and drive down the euro. Central banks in Canada and Australia also declined to hike their rates, a move that would have made their currencies more attractive relative to the dollar.

The Treasury's surprisingly successful $15 billion auction of five-year notes also helped. The key bullish fact was in the percentage of so-called indirect bidders. These are bidders who agree to buy at whatever rate is set in the auction rather than bidding at a precise rate that is acceptable -- sort of like the difference between a market and a limit order. The indirect bidder category encompasses foreign central banks that are buying Treasuries to stash dollars that they have acquired either through currency market interventions or growth in currency reserves that occurs from export sales.

Recall that one theory making the rounds among dollar and bond bears was that central banks would begin selling some of their dollar-denominated investments after getting fed up with the currency's declining value. Anecdotal evidence backed the theory, such as a seeming sale of dollars by OPEC members and Russia's expressed preference to begin holding more reserves in euros.

Wednesday's auction blew a hole in that theory as 65% of the sales went to indirect bidders, a phenomenally high percentage, the highest in more than a year, in fact. That helped both bonds and the dollar stage strong rallies. The yield on the 10-year Treasury note fell to 4.13% from 4.23% on Tuesday. Treasuries are slowly but surely reclaiming all of the losses they posted last month after the stronger-than-expected October payrolls report.

Legg Men

Wednesday was also Legg Mason's annual investing outlook session. In addition to Bill Miller, widely known for his record-setting 13-year streak of beating the S&P 500, the firm trotted out Bruce Sherman, head of its Private Capital Management unit, and Chuck Royce, who oversees the small-cap fund group that bears his name. Ken Leech, head of Legg's Western Asset Management bond division, was tapped to shed light on fixed-income matters.

Royce said he's been shifting money from micro-caps, stocks worth under $500 million, to the small-cap sector. Sherman, crowing about having bought Apple ( AAPL - Get Report) at $15, said he's holding PeopleSoft ( PSFT) and waiting for Oracle ( ORCL - Get Report) to raise its bid. Leech said he expected rates to rise moderately in 2005, with less Fed action than the market anticipates. Leech also said his firm was unwinding its bet on German treasury bonds, saying that most of the dollar's decline against the euro was done.

Miller said he expected that the 2005 stock market would do at least as well as the growth in corporate profits, which are projected to increase about 10%. Miller's streak for 2004 is still in jeopardy: With 17 trading days left in the year, he was trailing the S&P by less than 2 percentage points.

Two of Miller's biggest positions, Amazon.com ( AMZN - Get Report) and IAC/Interactive Corp ( IACI), have posted big losses for the year, more than offsetting gains in UnitedHealth, AES ( AES - Get Report), and, of course, Google ( GOOG - Get Report), which has doubled since Miller bought it at the IPO.

Miller is sticking with his losers, calling Amazon and IAC "two of the best values in the market." Amazon, which rose 1% to $38.72 Wednesday, is worth in the mid-$60s a share, while IAC, down 0.2% to $24.11, should be in the low-$40s, he said.

Google, even at $169.98 after falling 1% Wednesday, remains below its fair value as well, Miller argued. Trying to explain why the stock was issued so far below its worth, Miller said the auction IPO format forced investors to do their own calculations to determine the company's worth. In a typical underwritten IPO, investment bankers do the calculations and set a share-price range. "In this case, investors actually had to do work to put in bids, and since most investors are averse to doing work, that gave us an opportunity," he said.

He even cited the underpricing, which he also blamed on a series of negative news articles leading up to the IPO. Most of the press had little to do with the company's business prospects, but it still scared away investors, "which is why it was available at the bargain price of $85 a share," Miller said.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback.