Wall Street rally could continue, analysts predict

The strong run for Wall Street has ended, but analysts say the backdrop remains positive and that the year-end rally could continue.

After a remarkable winning streak from mid-October, the main indexes were mixed over the past week.

The Dow Jones Industrial Average, which flirted with 11,000 but failed to break through the barrier, fell 0.49 percent in the week to 10,877.51.

The broad-market Standard and Poor's 500 index dipped 0.26 percent to 1,265.08.

The tech-heavy NASDAQ composite index managed a gain of 0.46 percent to 2,273.37.

The mixed performance came despite economic reports that were surprisingly strong.

The latest revision of US economic growth for the third quarter showed a robust 4.3 percent growth pace, and factory activity held firm based on the Institute of Supply Management survey.

In terms of payroll growth, seen as one of the best indicators of economic momentum, data showed the US economy churned out 215,000 jobs last month, more evidence of the recovery from devastation of hurricanes Katrina and Rita.

But analysts said the market had been largely anticipating the solid economic news and needed to pause.

Eugene Peroni at Claymore Research said a breather was expected after last month's spectacular gains -- around 3.4 percent for the broad market.

"I am not calling for a market reversal. Far from it," Peroni said.

"November's gains have a foundation of months of base-building activity in a trading range. I simply believe that, at these levels, the market is near-term vulnerable to external events or disappointments," he said.

Peroni said the 11,000 mark for the Dow "may be elusive near-term," but that "it may be only a matter of time -- little time, perhaps -- before 11,000 is overcome."

Dick Green at Briefing.com said he believes the year-end lift may not be over.

"There may not be too much left in this rally, but a positive tone is likely to continue through year-end," he said.

"The rally is supported by fundamentals. Economic growth remains strong and the impact from hurricane Katrina is now largely past. Energy prices are declining and gasoline prices are actually below pre-Katrina levels. The only real concern is inflation, and it will be the key to whether the stock market will do well in 2006," Green said.

Bob Doll, chief investment officer at Merrill Lynch, remained somewhat cautious, saying "there is still some risk that stock prices could decline as weaker economic growth undermines corporate earnings expectations, which we believe remain too high."

"In our opinion, the markets still need to weather a period of disappointing corporate earnings growth, as expectations need to be ratcheted down for 2006," he added.

Analysts said that despite the recent gains, the stock market could move higher because valuations remain attractive and economic growth is strong.

"The combination of better-than-expected earnings in 2005 and a relatively flat stock market has resulted in improved valuation levels for stocks," Doll said.

"Unless we see further significant increases in interest rates, these improved valuation levels should, at a minimum, create a floor for the markets," he said.

Bonds fell over the past week. The yield on the 10-year bond increased to 4.519 percent from 4.474 percent a week earlier and the 30-year bond rose to 4.717 percent from 4.664 percent. Bond yields and prices move in opposite directions.