After strong gains propelled Wall Street to its best levels in more than four years, analysts are pondering whether the market is ready to extend the rally or is setting up for a correction.
After five weeks of rises, two of the three main indexes sat at their best levels since mid-2001 and the third is within a few points of a fresh high.
The Dow Jones Industrial Average climbed 1.53 percent in the holiday-shortened week to Friday to close at 10,931.62, less than 10 points from its highest level since June 2001 and within striking distance of the key 11,000 level.
The broad-market Standard and Poor's 500 broad-market index added 1.6 percent to 1,268.25, holding at its highest point since 2001 after marking seven days of gains. Also at a four-and-a-half-year high, the tech-heavy NASDAQ composite rallied 1.61 percent to 2,263.01.
The strong gains came as the market entered the Thanksgiving-to-Christmas season that is traditionally the strongest of the year.
"Stocks are benefiting from positive seasonal trends, in-place momentum, oil under US$60 per barrel, higher-than-expected consumer sentiment, and signs that some Fed members are concerned that interest rates might go too high," Al Goldman at AG Edwards said.
Yet some market watchers are questioning whether the heady gains of recent weeks -- 11 percent for the NASDAQ and 7.7 percent for the S&P 500 since the middle of last month -- are setting up the market for a fall.
"There is increased concern that the market is getting ahead of itself," said Robert Pavlik, chief investment officer at Oaktree Asset Management.
"We've come so far so fast and the market has not had a chance to consolidate. The question for next week is whether we will get a continuation of the rally or a selloff," he said.
Some say that the rally is being fueled by too much speculation on a year-end rally, which may be self-fulfilling but unsustainable.
"Buoyed by the stock market's rebound in recent weeks, sentiment has grown overly positive, and I expect the market to disappoint investors between now and year-end," Byron Wien at Morgan Stanley said.
Others say the market rally has legs because of an improvement in the economic outlook and still relatively attractive prices for stocks after a long period of stagnation on Wall Street.
Joseph Abate at Lehman Brothers said that notwithstanding gloomy forecasts after Hurricane Katrina, "recent data suggest the economy has more momentum than reckoned. Consumer spending has not cooled much despite higher energy prices."
Eugene Peroni at Claymore Research dismisses concerns about a market "melt-up" fueled by speculative fever, saying that the economic backdrop has allowed for a broad-based rally.
"The stock market has not attracted high concentrations of capital into any one sector over a longer-term period," Peroni said.
"It is this impressive, wide sector participation that I believe augurs well for the market's longer-term upside with minimal risk of a melt-up that could produce an undesirable speculative froth and a climactic conclusion of the recovery," he said.
Bonds firmed over the past week. The yield on the 10-year bond fell to 4.474 percent on Friday from 4.502 percent a week earlier and the 30-year bond fell to 4.664 percent after 4.692 percent. Bond yields and prices move in opposite directions.
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