This week, the market swung its arms around signs of a slowing economy and the likelihood that the Federal Reserve will soon stop raising interest rates.

Amid warm feelings over those prospects, markets capped off a choppy week by celebrating the Bureau of Economic Analysis' second-quarter GDP estimate of 2.5% Friday -- below economists' forecasts of 3%. The market reclaimed the Bernanke-led rally of last week, and the week ended on a bullish note.

The Dow Jones Industrial Average gained 1.08% on Friday and 3.2% for the week, closing at 11,219.78. It was the average's best one-week performance in 19 months. The S&P 500 finished up 1.21% Friday and 3.1% on the week, closing at 1278.46. The battered Nasdaq Composite finished up 1.93% Friday and up 3.7% on the week, to close at 2094.19.

Happiness that the economy slowed more than expected seems oxymoronic, which is why Friday's rally is suspect. That's not to mention the lingering possibility of another rate hike due to inflation data that continue to creep upward. The core price index for personal consumption expenditures, excluding food and energy price fluctuations, grew 2.9% year over year in the second quarter, up from a 2.1% increase in the first quarter.

The markets may be relatively unconcerned about the inflation levels after Bernanke's testimony last week indicated that the upper limit of the Fed's 1% to 2% inflation "comfort zone" is "soft," writes Ethan Harris, chief economist at Lehman Brothers. Bernanke suggested in his testimony that the Fed is comfortable with a forecast of inflation growth between 2% and 2.5% through this year and even beyond. The Fed's beige book this week emphasized the body's sanguine outlook on inflation, and the markets cheered the news.

At midday on Friday, the futures market put the likelihood of another fed funds rate hike on Aug. 8 at 26%, down from 45% Thursday and 90% prior to Bernanke's testimony of July 21, according to Tony Crescenzi, chief fixed-income analyst at Miller Tabak. Crescenzi notes that the futures markets price in greater odds of a fed funds rate cut than they do a hike over the next year. "The market is priced for greater odds that the funds rate will be 5% next year, than 5.5%," he writes.

The bond market, which has been trading at yields below the 5.25% current fed funds rate for more than a week, has telegraphed concerns about the Fed overshooting and killing the economy. The GDP numbers sent Treasury prices soaring anew Friday, to end the week at yields below 5%. The 10-year Treasury bond gained 11/32 to yield 4.99%, while the five-year note climbed 8/32 to yield 4.91% and the two-year bond added 4/32 to yield 4.98%.

So, investors leave for the weekend pondering whether or not a late-July rally could become a late-summer rally. Or perhaps Friday's gains were another short-lived technical boost with little follow-through to come.

"We need to see follow-through," says Louise Yamada, founder of Louise Yamada Technical Research Advisors. Yamada's models show the market's oversold conditions have persisted. "There is still selling pressure out there ... rallies are never defined in a day."

Yamada warns that many stocks that experienced breakdowns past various levels of support are experiencing "kickback rallies," which is a sign that the bullish tone may be short-lived. Kickback rallies happen when stocks break below technical levels, triggering buying, which pushes them back up to prior tops, which in turn triggers selling into that rally. These rallies make the overall market look strong, but they are trading trends stuck in a cycle.

Kickback rallies have appeared in the semiconductor sector and the housing sector, says Yamada. Indeed, these torn and beaten-up parts of the marked fared this week. The Philadelphia Semiconductor Sector Index gained 3.04% Friday, and jumped 7.1% on the week. The Semiconductor HLDRs ( SMH) exchange-traded fund gained 2.39% Friday and 7.2% on the week.

The homebuilders, which have been sinking since August 2005, when the housing market itself peaked, also kicked back this week. The Philadelphia Housing Sector Index climbed 2.10% Friday and 5% on the week. Within that, some of the pessimistic homebuilding companies, in terms of their earnings forecasts, rallied. D.R.Horton ( DHI) gained 3.85% Friday and 11.8% on the week. Centex ( CTX) gained 1.69% Friday and 6.6% on the week.

Investors moved solidly into defensive stocks and sectors, as prior leadership lost its grip on the reins. Such a transfer often means investors who must put their money to work are taking a "wait and see" approach to the market -- another sign of low confidence in the rally.

Investors shifted into the financial stocks, hoping that their interest-rate sensitivity makes them poised to benefit from a Fed pause. The Amex Securities Broker/Dealer Index gained 2.43% Friday and 4.6% on the week. The Consumer Staples Select Sector SPDR ( XLP) gained 0.94% Friday, 1% on the week.

The Dow Jones Transportation Average, which was the only index to reach an all-time high so far this year, doing so in May, fell 0.93% on the week. It gained 2.54% in Friday's rally.

As the market's mood lifted Friday, earnings disappointments from economic bellwethers such as 3M ( MMM)and UPS ( UPS)faded into the backdrop. For most of the week, earnings misses were pummeled more than earnings successes were rewarded. 3M's shares ended up 1.1% Friday, but down 0.3% on the week, while UPS gained 2.28% Friday but lost 11% on the week.

Investors may be embracing an economic slowdown as their fears of the Fed overshooting wane, but the underlying picture is imperfect. A so-called soft landing depends not on the Fed stopping its rate hike campaign, but on the actual data streaming in to show that consumers are still relatively fine, that businesses still spend and that inflation isn't too high. So, those expecting a bull market without further fits and starts are likely whistling past the graveyard -- yet again.

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In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click here to send her an email.