Wall St. wanted some sign that the the recession might not be pulling the economy under for the next four or five quarters. Some investors still have hopes that the downturn will not be deep and long.

Last week, women and children flooded that streets of the Financial District as prices of crippled financial companies took to the sky like fireworks. By the end of the week some of the weakest members of the S&P had posted out-sized returns. Stocks in financial firms including Merrill Lynch (MER), Citigroup (C), Wells Fargo (WFC), and JP Morgan (JPM) were up between 7% and 10%. Lehman (LEH) rose over 14% for the period. At these rates, most big financial stocks could reach their 52-week highs less than two months.

The tech sector looked almost the same. Oracle (ORCL) rose almost 10%. Microsoft (MSFT), about to report earnings, was up over 6%. Intel (INTC), IBM (IBM), Apple (AAPL), and RIM (RIMM) had outstanding weeks. The gains in Google (GOOG) and Baidu (BIDU) were beyond comprehension.

Most of the sharp improvement was driven by three pieces of information. IBM’s business grew well in almost every segment and every region. That allowed investors to check the box for good news in software and hardware. Google beat anticipated results. That took care of concerns about the internet sector. Citigroup posted big write-offs, but analysts in the bank sector started to pay lip service to the idea that the worst might be over in the credit markets.

As Bank of America (BAC), Microsoft, AT&T (T), and Boeing (BA) report over the next few days, positive signs could push the Dow up a few hundred more points. The index high is only about 1,400 points away. Why not take that out in the process?

All of this rally news may well be drawing investors into a trap. The core elements which have caused the market to go down and recession talk to go up are still in place. The American consumer is still as poor as a church mouse. Most companies outside the Fortune 1000 are still having trouble getting credit to expand their businesses. Drops in interest rates are not being passed from banks to consumers. Perhaps most insidious, the cost of gas and commodities are still rising sharply.

It may not take more than one or two pieces of bad news to break the back of the rally. There is still tough credit news hiding in the forest nearby. Some is about housing, some about credit card and auto loans, and some about the continuing fall in value of derivative securities. Oil may keep driving higher. There may be a very big jump in unemployment disclosed in the next month.

This rally is a rally until it isn’t, and that is not too long from now.

Douglas A. McIntyre

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