NEW YORK ( TheStreet) -- Contagion's back!

Through Thursday's close, the market had put together another impressive week. The cracks that had started to appear were getting short shrift as earnings season picked up steam, and high-fliers like Caterpillar ( CAT) (the Dow's top performer in 2010) and Netflix ( NFLX) (the same for the S&P 500) delivered strong results.

The Federal Reserve delivered a very dovish message on Wednesday -- once again validating "QE2" -- and doing so with a complete lack of dissent, so it looked like 2011's non-stop bull run still had some legs.

The Dow Jones Industrial Average spent a few sessions crisscrossing 12,000, and the S&P 500 did the same with 1,300, and each index closing above those levels in the near future seemed a foregone conclusion.

Then Cairo caught fire, and it all fell apart. Add in Ford Motor's ( F) confounding fourth quarter, which was so far off of Wall Street's consensus view that executives acknowledged they needed to do a better job of communicating their outlook to investors, confusion over the Nasdaq's technical problems at the open, and a pedestrian read on fourth-quarter gross domestic product, and the rally has officially stalled.

When the closing bell clanged on Friday, the Dow's eight-week winning streak was history, and the VIX, Wall Street's so-called fear gauge, had leapt more 24% to close at 20.04 for its first finish above 20 since Dec. 1, right around when the Dow's streak began.

Maybe we should have paid more attention when AdvisorShares Investments launched the Active Bear ETF ( HDGE), billed as the first actively managed ETF that shorts stocks, on Thursday, as being a sign of a top. It could turn out to be an incredible coincidence, at the very least.

Suddenly a relatively good earnings season -- 207 of the companies in the S&P 500 have reported so far and according to the latest Thomson Reuters data, 71% have beat analyst expectations -- is taking a backseat to Hosni Mubarak's teetering regime, and the word "contagion" is already making a comeback with market watchers.

"For the start of the week ahead, market participants will be watching to see how events in the Arab world continue to play out," writes Robert Pavlik, the chief market strategist with Banyan Parnters, in his weekly commentary email. "Should the Egyptian situation unravel to the point of contagion into neighboring countries, the market will certainly react negatively."

Contagion had a good run in 2010, sparked by the debt crisis that erupted in Greece in late April, derailing the year's strong year-to-date performance and setting the stage for a forgettable summer for stocks. This time around, it's not likely to play as prominent a role in the market's ups and downs, as Egypt doesn't carry the same economic weight as Greece. At the same time, given the stellar run that equities have been on, this could be just the excuse/reason that investors need to take some money off the table.

The more worrisome headlines this week for an investor taking the long view should have been the Congressional Budget Office's January economic outlook report. The short version is it's ugly out there, and it's going to stay ugly for a long, long while, especially if you're not lucky enough to be gainfully employed. The following paragraph puts in perspective just how slow the recovery really is (even with QE2 in full effect).

"The recovery in employment has been slowed not only by the moderate growth in output in the past year and a half but also by structural changes in the labor market, such as a mismatch between the requirements of available jobs and the skills of job seekers, that have hindered the reemployment of workers who have lost their job," the report released Wednesday reads. "Payroll employment, which declined by 7.3 million during the recent recession, gained a mere 70,000 jobs (or 0.06 percent), on net, between June 2009 and December 2010. (By contrast, in the first 18 months of past recoveries, employment rose by an average of 4.4 percent.) "

Ouch! Kind of makes the next non-farm payrolls report due next Friday seem a bit less explosive.

It's likely the unrest in Egypt will get resolved fairly quickly, and while a new government in the country will be a historic development, the U.S. market won't waste time moving on. Taking out Friday, there were plenty of positive takeaways from last week's news flow.

The IPO market was going gangbusters with successful debuts from BankUnited ( BKU), Demand Media ( DMD), and Nielsen Holdings ( NLSN), and LinkedIn filing for its own share sale.

M&A picked up, most notably with Verizon Communications' ( VZ) deal for Terremark Worldwide ( TMRK) and late Friday came a report that Alpha Natural Resources ( ANR) is close to laying down $7 billion in cash and stock for fellow Virginia coal producer Massey Energy ( MEE). And don't forget the lift the market got Monday from Intel's ( INTC) buyback and dividend plans. Companies are both raising money, and putting their cash to work or else returning it to shareholders.

At the same time, inflation hounds were thrown more than a few bones as companies like ( AMZN) and Procter & Gamble ( PG) among others said their costs were on the rise.

Another 102 S&P 500 companies report next week, so we'll be over the hump soon, and what the Fed is going to do when its $600 billion worth of stimulus dries up at the end of the second quarter will start to move to the forefront of the market's collective mind.

Maybe a better sign of how close a top may really be is evidence that retail investors, after withdrawing $56.3 billion in 2010 and $46.9 billion in 2009 from U.S. equity mutual funds and ETFs, added $12.9 billion to those vehicles in January, according to the latest TrimTabs data.

"Are mom and pop finally putting their money where their mouth is?" the research firm asks.

If so, it may be just in time to see those balances shrink.

-- Written by Michael Baron in New York.

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