Is This Rally for Real?

After five straight days of gains, investors wonder if the momentum can continue. Due next week: earnings reports from retailers and updates on durable goods orders and GDP

Stocks ended higher Friday after spending most of the session meandering near unchanged. In the final hour of trading, a firmer tone unfolded which may have been related to the expiration of May options. A strong earnings report and outlook from Dell Computer (DELL ), along with a better-than-expected reading on consumer sentiment, also fueled some buying.

The Dow Jones industrial average gained 63.80 points, or 0.62%, to 10,353.08. Meanwhile, the Nasdaq Composite was up 10.95 points, or 0.63%, to 1,741.39. And the broader Standard & Poor's 500 index added 8.36 points, or 0.76%, to 1,106.59.

With the market logging one of the best weekly performances of the year, many investors wonder if stocks can run higher. "Longer term, the market looks positive, despite negative seasonal influences along with Enron-related and other [news-related] influences," says A.C. Moore, chief investment strategist at Dunvegan Associates in Santa Barbara.

The good news, he says, is the economy is still showing signs of improvement, especially with the latest jump in retail sales. Also, money flows into the market have been picking up, while earnings forecasts -- particularly in the tech sector-- are becoming more upbeat.

However, Wall Street is still skeptical about the recovery in earnings. "The herd is not motivated to move-- they need more guidance from companies beating estimates," Moore says. Plus, we are currently in a seasonal period when there are not many product announcements from technology and other companies, while market interest may be low as investors plan summer vacations.

Next week, economic data is light until the end of the week. On Monday, S&P MMS expects leading economic indicators to slip 0.1% in April after a 0.1% rise in March. The decline in the index during the month should knock the year-over-year growth rate to 3.1% from 3.3%.

On Thursday, durable goods orders and weekly jobless claims are due out. Friday brings reports on new home sales during April and the preliminary reading on first quarter gross domestic product. The previous GDP growth estimate for the first quarter, which was reported at the end April, was 5.8%.

On the earnings front, Lowe's (LOW ), Toys R Us (TOY ) and several specialty retailers are scheduled to post quarterly results. Other companies expected to report earnings next week include NVIDIA (NVDA ), Medtronic (MDT ), and Krispy Kreme (KKD ).

The market got some support Friday from the University of Michigan consumer sentiment survey, which unexpectedly rose in May to 96.0, the highest level since December, 2000 and above March's reading of 95.7. Most economists had expected sentiment for the May preliminary reading to fall slightly to 92.5, from 93.0 in April.

In a separate report, the U.S. trade deficit narrowed to $31.63 billion in March from a revised $31.75 billion deficit in February ($31.5 billion originally). Imports rose 0.3%, while exports increased a stronger than expected 0.6%. The strength in both exports and imports indicates that the U.S. economy is improving. The dollar was falling in reaction to the report.

No major companies reported earnings Friday, but a few well-known names reported results after Thursday's market close. Dell reported first quarter earnings of $0.17 per share, a penny higher than the consensus estimate. Revenues rose 0.5% from a year ago to $8.07 billion, above expectations. The PC maker sees second quarter EPS of $0.18, vs. the current consensus estimate of $0.17.

Schering-Plough (SGP ) shares gained after it reached a deal Friday with the Food and Drug Administration to resolve issues at the company's manufacturing units in New Jersey and Puerto Rico. The drug maker agreed to pay $500 million to the U.S. government. As a result, the company cut its low double-digit 2002 EPS percentage increase forecast to the mid-single-digits.

In the tech sector, Network Associates (NET ) shares rose after the security software maker completed its internal accounting investigation, which resulted in a restatement its 1998-2000 statement of operations and balance sheet.

The chip equipment sector lost ground after negative guidance from Kulicke & Soffa (KLIC ) put pressure on the group. Chip stocks had climbed earlier in the session after the April book-to-bill ratio of the North American semiconductor equipment makers released last night jumped to 1.20 in April from a revised 1.05 in March. A book-to-bill of 1.20 means that $120 worth of new orders were received for every $100 of product billed for the month. The three-month average of orders rose 17% from March.

Sectors moving to the upside in Friday's session included pharmaceuticals and industrial conglomerates. One of the worst-performing group: oil companies, in the wake of a sharp drop in crude prices Friday on news that Russia told OPEC it decided to lift its 150,000 barrel-per-day export cut over the next two months.

Utility stocks also continued to dive amid more revelations about questionable accounting, liquidity issues, and lack of funds to build new plants.

Meanwhile, the dollar fell to a 5-month low against the Japanese yen, indicating foreign money is not moving into U.S. markets, according to S&P. The dollar is on the ropes amid weak recovery prospects, while optimism that the worst is over in Japan fueled a yen rally.

Treasury Market

Treasuries ended lower in price, sending yields higher, as stocks began their Dell-inspired bounce. The curve was hit further after much better than expected Michigan sentiment data weighed yet again, says S&P MMS.

World Markets

European stock markets were lower. S&P notes that energy shares were the worst performers Friday on news that Russia will continue to pump oil. In London, the Financial Times-Stock Exchange 100 ended with a loss of 30.50 points, or 0.58%, to 5218.00.

In Germany, the DAX Index lost 22 points, or 0.4%, to 5,025. And in France, the CAC 40 fell 23.42 points, or 0.52%, to 4,442.94.

In Asia, the markets ended higher. In Japan, the Nikkei rose 108.63 points, or 0.93%, to close at 11,847.32, led by tech stocks such as NEC and Sony. Optimism rose over the earnings outlook for the technology sector following strong financial results from Dell and the rise in the April book-to-bill ratio.

In Hong Kong, the Hang Seng gained 141.84 points, or 1.20%, to close at 11,974.61.

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