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The bull market sensitive stocks, the brokerages and retail stocks, also joined in the rally.  The Russell 2000 rallied almost 3%, but as we've said before take this index with a grain of salt because the top of this "small cap" index includes such mega cap names as CMGI, E*Trade, and Real Networks.  Strip these 3 stocks out of the index and the Russell's performance yesterday becomes just ho-hum.

Left out of yesterday's rally were the fear sensitive gold and utility stocks which had rallied over the past week during the market's temporary relapse.

Significant this week has been the ability of the S&P 500, NASDAQ, and the Transports to flirt with disaster and bounce up off support levels. The 3 indexes are likely to move higher in the short term. The inability of the 3 indexes to join the Dow in record territory this week is a negative for the intermediate term however.

The short term is what will matter today however as the market will likely attempt to rally strongly following IBM's blowout numbers.  The tech sector's recent bad case of earnings jitters will likely be completely erased by IBM's better than expected numbers and rosy outlook for the future. "Strong" earnings from Internet companies CNET and Go2Net (and did we mention a pair of stock splits) after yesterday's bell will ignite the feeding frenzy in Internet stocks once again today.

Today will feature another full slate of earnings announcements for the market to digest, or cheer as has been the case recently.  This earnings period has left investors feeling upbeat as expectations have been met or exceeded.  This earnings period, and the increase in bullish sentiment it has spawned, is likely setting the market up for a rude awakening down the road.

We wonder how long the focus will stay on the beating of (in many cases diminished) expectations, rather than the actual numbers.  Yesterday's numbers from Coca Cola were a case in point as the stock rallied after the company exceeded expectations.  Overlooked was the 11% drop in earnings.  Coca Cola's ability to rally on what essentially are bad numbers is not an isolated event however.   The S&P 500 staged a healthy rally in 1998 even as corporate profits declined for the year.  How long the smoke screen of the beating of diminished expectations will be able to both drive stock prices higher while covering the declining quality of corporate earnings is a question that will likely determine how long the current run endures.

A stock split announcement from Citigroup helped steady the financial sector yesterday and helped the brokerage stocks step back from the brink (of breaking below support).   The S&P 500 also held its own (in this case support at 1286) and rallied to 1306.17.  We would watch 1286 on the downside and 1318 on the upside in today's trading.

The Internet sector rallied strongly yesterday after an astute analyst found value in a trio of stocks trading at 41, 42, and 108 times sales.   A second quarter operating loss (to be fair it was lower than expected) and a forecast of future losses from E*Trade added fuel to the Internet rebound and helped spark NASDAQ to a 64 point gain.  NASDAQ finished at 2409.65, a point below its 55 day moving average.  The index has not spent more than 2 days below its 55 day moving average since October, and a third close below the average today would be bearish and would likely result in a retest of support around 2313.

NASDAQ will likely end its 2 day stay below the 55 day moving average today. Internet stocks will likely lead the index higher today following the announcements of (better than expected) losses from Xoom.com and RealNetworks (who threw in a 2 for 1 stock split for good measure).

With money moving into the old favorites yesterday, the cyclical were banished to the doghouse from which they recently emerged.  The Dow Transports tumbled 72.79 and at this point they appear more likely to break below the 3461 support level than to rally to new highs.

The recent optimism that fueled the sharp rise in the transports and other cyclicals may have been a bit premature.  The Commerce Department reported yesterday that the trade deficit grew to a record $19.4 billion.   The report showed exports falling for a fourth straight month.  Until demand picks up in the global economy, any hopes for a sustained rebound in cyclical stocks remains on hold.  The report also showed a $1 billion increase in imports of consumer goods. A U.S. consumer with a negative savings rate and a strong demand for consumer goods remains the driving force (and some would say the only) behind the U.S. economy's continued strong showing.

The deeply ingrained buy on the dip mentality that has built up since 1987 did not end with yesterday's tech stock blood bath, and we will likely see an attempt by bargain hunters to steady the averages this morning, but the belief that making money in the markets is easy was likely severely damaged by yesterday's action.

More than a few of the new breed of "traders" who have approached the markets as a game of easy money were probably rudely awakened yesterday to the fact that trading is not a sport, or a one way ticket to the easy life, it is in fact a business that needs to be approached like a business if one hopes to succeed in it over the long term.

The bubble of speculative excess and of its principal vehicle, the Internet stocks, was pricked yesterday, and the days ahead will likely see a continued shrinking of the bubble of excess as reason slowly but surely supplants emotion as the basis for trading decisions. We do not expect every newly declared "master of the markets" to learn the names Graham and Dodd overnight, but the day is coming.

While the market has made a short term top, there will likely be one final attempt at new highs before a long term top is put in place.  A long term top is likely already in place among many Internet stocks, including the online brokers and the Internet banking issues where speculation rather than fundamentals has been the driving force.

The move into cyclicals will likely continue in the early part of this week as the combined forces of jump-on-the-bandwagon momentum and money managers trying to find a final resting place for last week's pre-deadline inflow of retirement funds continue to push the cyclicals higher.

The ability of the cyclicals to sustain their rally past this week remains in question however.  A large part of last week's upward spike was due to a recent malady suffered by many fund managers, namely "fear-a-da-tech-earnings".  Figures released by AMG Data Services on Thursday showed a continued inflow of funds into large cap equity funds ($1.9 billion), and out of small caps ($866 million).  Fund managers, faced with a river of cash flowing into large cap funds and a need to stay fully invested, needed to find a large cap sector replacement for their old favorites (the tech stocks).   With hopes for a global economic recovery dancing in the heads of many a   pundit, the beaten down large cap cyclicals beckoned.

As the market enters a seasonally slow period for retirement fund inflows, fundamentals will have to take up the slack in order to drive the cyclicals higher.  The fundamentals of recovery continue to be long on hope and short on reality.

In Japan, near zero interest rates and massive public works spending has stopped the slide, but there is no sign of recovery in sight.   Capital spending continues to decline, and consumer spending is being dragged down with it. With sectors that account for 75% of the Japanese economy locked in a downward spiral, there is little hope for recovery.

Europe, too, is long on hope but short on reality.   Recent interest rate cuts will do little to solve Germany's high cost basis.   Any positive effects of recent rate cuts could also be negated if the war in Kosovo drags on and European NATO member nations are forced to add to their already high debt burdens to finance a protracted, intensified war.

In the U.S., the economy remains strong, but it is a consumer led economy.  The manufacturing economy remains weak and is showing few signs of improvement. Friday's industrial production and capacity utilization reports pointed to continued weakness in the manufacturing sector.  First quarter industrial production figures were the weakest since 1991, and March capacity utilization hit a 7 year low.  Without a pickup in the manufacturing sector the cyclical stocks can not sustain their rally.

The immediate benefits to U.S. cyclical stocks from the economic recoveries underway in South Korea, the Philippines, Singapore, and Thailand are also overstated.  There continues to be a surplus of capital equipment in much of Asia, and the early beneficiaries of any pickup will likely not be the capital equipment makers.  At this stage in Asia's recovery, a Foster Wheeler or a Fluor is more likely to benefit than a Caterpillar or a Deere, likewise a Cathay Pacific is more likely to benefit than a Boeing.