SAN FRANCISCO -- Maybe this really is the kind of market where investors are accentuating the positive, short-sellers are running scared, and the bulls are back in charge, as a growing number of market players would have you believe. But you wouldn't have known it from the action on Tuesday. The Dow Jones Industrial Average rose 1.2% to 10,393.07, but couldn't sustain an early move to as high as 10,439.31. The Dow was inspired by financial components such as J.P. Morgan ( JPM) and consumer giant Procter & Gamble ( PG), up in sympathy with Colgate-Palmolive ( CL), which posted better-than-expected earnings. The index was dampened by weakness in tech heavyweights such as Hewlett-Packard ( HWP), which was weighed down by various rumors about a pending profit warning. (Turns out something was going on at H-P, but nothing along those lines; after the close, the company announced plans to acquire Bluestone Software ( BLSW).) Confounding sentiment the Dow is irrelevant or no longer representative of "the market," the same forces -- strong financial and consumer stocks vs. weak technology issues -- also held sway over broader averages, which suffered for their higher tech weightings. The Nasdaq Composite fell 1.4% to 3419.79 after trading as high as 3526.71, while the S&P 500 managed to rise 0.2% to 1398.13, but closed off of its session high of 1415.69 The Comp was restrained all day long by chipmakers, saddled by a profit warning from National Semiconductor ( NSM), which tumbled 34.4%. The Philadelphia Stock Exchange Semiconductor Index shed 7.8%. Given the SOX had risen about 20% in the four trading sessions prior to today, it's entirely logical to presume the sector, and techs in general, were simply due to recede a bit after the recent ascent. To be sure, the hackneyed phrase "profit-taking" was precisely how many market players summed up the action. "Today was just a case of the Old Economy
stocks back in favor and the New Economy stocks taking a break," surmised Bob Basel, director of listed trading at Salomon Smith Barney (who avoided the "PT" phrase). Simple enough. Tidy even. But Basel proceeded to launch into an unprompted mini-tirade about how "weird" the market has been. Specifically, the trader wondered, what fundamental development spurred investors to go from almost terrified a week or so ago to approaching euphoric today? Basel ticked off reasons the market rallied from a sub-10,000 Dow and why he's far from bearish: higher cash levels; a relatively calmer situation in the Middle East; higher oil prices that have been factored in; and a sense consumer spending has slowed but not stopped. "But I don't see the big catalyst" for the tectonic shift in sentiment, the trader continued. "Maybe there was a bit of capitulation last Wednesday but did somebody lower rates? Were earnings that much better" than expected? Basel's comments struck home because I too have been grappling with the question of why stocks should continue to rally, and have yet to arrive at a satisfying answer. Perhaps you can provide one by taking the poll at the end of this column. Last night and in recent weeks I've written about how the vast majority of Wall Street strategists have been and remain bullish. On the other hand, there's Thomas McManus, equity portfolio strategist at Banc of America Securities, who maintains a cautious recommended allocation of 60% stocks, 35% bonds and 5% cash. Last Wednesday marked a bottom in the sense that prices for many stocks are higher now than they were then, McManus conceded with a hint of mirth. But "even though we saw a period of rampant, panicky type selling a week ago Wednesday, I don't think those low prices were available long enough to be construed as a real selling climax." Rather than an absolute bottom, he theorized that last week may have marked the end of the "second leg" of the bear market in technology stocks (and, yes, he used the "B" word). A third leg -- characterized by redemptions from tech-focused mutual funds -- may be next. For the week ended Oct. 18, inflows into tech-specific mutual funds totaled $60 million, down dramatically from the peak in March, when they approached $3 billion a week, McManus noted. But still, the trend has remained positive save for a few scattered weeks of small outflows. "Inflows have moderated substantially but it won't be a complete, reliable, viable bottom until we see more in the way of traditional signs of liquidation," he said. "At the bottom, investors liquidate. Maybe it doesn't happen that way this time . My hunch is it will." Some of you no doubt think I'm some kind of perma-bear who's rooting for stocks to fall. I'm not, I swear. But given the fundamental backdrop, I think you should at least be cognizant of the possibility that everything isn't hunky dory, even if the majority of pundits and gurus are saying otherwise. The news after the close from Nortel ( NT), which cast a pall over previously unstoppable optical-networking stocks (as Herb Greenberg and Jim Cramer deduced in real-time in RealMoney.com's Columnist Conversation) and sent Nasdaq 100 futures reeling in the Globex session, providing another reason to be on guard against overzealousness. Stocks will rally because.... A slowing economy will force the Fed to ease. The good earnings are more important than the ones that aren't. Higher oil prices, the tumbling euro, and slowing economic and profit growth aren't really "bad." That's what they do, silly. I said so, gosh darn it!