In Week's Gains, Rally Holds

Despite languishing Friday, Wall Street turned in another positive week, defying warnings that a summer rally was unsustainable while the economy remains weak.

Investors now appear more concerned about missing a cheap opportunity to gain a foothold back in the stock market than about a potential sell-off, analysts said. All of the major indexes touched their highest levels for the year this week before a slight pullback.

The Dow Jones industrial average gained 1.7 percent during the short holiday week and is now up more than 9 percent for the year. The blue-chip index has increased three of the past four weeks. The broader Standard & Poor's 500-stock index and the technology-heavy Nasdaq gained 2.6 percent and 3.1 percent, respectively, this week. They are up 15 percent and 32 percent this year.

"The path of least resistance seems to be upward," said John Wilson, co-head of equity investment for Morgan Keegan, an investment firm.

The rally has been confounding to some analysts who see continued weakness in parts of the economy tempering signs that the recession is easing. A Federal Reserve report this week gave a mixed picture of the economy, noting that while growth overall may have resumed, there are still large pockets of weakness.

"The market continues to defy the skeptics by seeking out incremental gains," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

All of the news this week has not been positive. The dollar fell to its lowest point for the year against the euro, and the cheap greenback has steered investors to commodities such as oil and gold. On Friday, gold futures for December delivery closed at $1,006.40 a troy ounce on the Comex division of the New York Mercantile Exchange. That close is its highest since March 2008.

"We're watching the dollar fall off the face of earth, and the stock market doesn't seem to care," said Joseph Saluzzi, co-head of equity trading at New Jersey-based Themis Trading.

The rally stalled Friday as investors cashed in profits, ending a five-day streak of gains. The Dow fell 22.07 points, or 0.2 percent, to 9605.41, while the S&P 500 fell 1.41 points, or 0.1 percent, to 1042.73. The Nasdaq lost 3.12 points to close at 2080.90.

"After moving 40 percent in the last 2 1/2 months, you want to take some profits," said Matthew Smith, president and chief investment officer at Smith Affiliated Capital in New York.

Investors shrugged off some positive news Friday. FedEx raised its first-quarter earnings forecast, citing cost cuts and better-than-expected international shipments, which fueled a 6.4 percent increase in the company's stock. Also, consumer confidence rose more than forecast in September, according to the Reuters/University of Michigan preliminary index. The index, which rose to 70.2 from 65.7, is still low by historical standards but is showing improvement, analysts said.

"Consumers are feeling better than they were when the economy was plunging during the winter, but they are still feeling much worse than before the housing downturn began, and they are feeling worse than at any point during or after the 2001 recession," Abiel Reinhart, an analyst with J.P. Morgan Chase, wrote in a research note.

Businesses also reduced wholesale inventories for the 11th consecutive month in July, according to Commerce Department data. But sales rose by 0.5 percent, the largest increase in more than a year. Rising sales could translate into more orders for goods that would boost production at stalled factories, analysts said.

Investor optimism will be tested next week by a slew of new economic data, including on retail sales and on the housing market. Weakness in consumer spending continues to nag at even optimistic economists, and disappointing retail sales could spark new concerns, analysts said.

"The consumer is not alive," said Saluzzi of Themis Trading. "If you believe the consumer is 70 percent of the economy, then 70 percent of the economy is still dead."