Stocks soared 6% last week on relatively low trading volumes, as continued short-covering helped the market put together two consecutive up weeks for the first time since early July.
Though the rally is young yet, already some participants doubt its longevity, given that much of the activity appears to be computer-driven momentum-buying and short-covering, not some Niagara of traditional buy orders. Moreover, while third-quarter earnings reports came in as expected, the sovereign-debt situation in Europe could deteriorate in a heartbeat. Consequently, many institutions remain on the sidelines, traders say.

Nevertheless, no one will reject a rally after the past 10 weeks of troubles. The Dow Jones Industrial Average closed at 11,644.49, up 5% from the previous Friday. The Nasdaq Composite finished at 2668, ahead some 8% on the week,

The fact that the market moved so much on less-than-strong volume and on little in the way of real positive news gives rise to skepticism, traders say. Christopher Zook, chief investment officer of CAZ Investments in Houston, concurs: “It’s not like the European situation has been solved. It’s feeling like a bear trap.”

For the week, the economic news was mildly positive. Friday, the Commerce Department said September retail sales rose 1.1%, above consensus, with auto sales strong. However, the Thomson Reuters/University of Michigan’s preliminary October read on the consumer-sentiment index fell to 57.5 from 59.4 in September, below expectations.

One interesting snippet comes from Jeff Smisek, CEO of the largest U.S. airline, United Continental Holdings (ticker: UAL). He said Wednesday that he didn’t see signs of an imminent recession in bookings and business travel. Airlines are the economy’s litmus paper, so that speaks volumes, at least about the next few months.

In the way of earnings, less than two score of the Standard & Poor’s 500 index firms have reported third-quarter numbers so far, and they generally met expectations, with Google (GOOG) showing strong earnings and JPMorgan Chase (JPM) not.

The S&P 500 did move above its 50-day moving average, and “the tone of the tape” has improved, according to Mike Hurley, a portfolio manager of the Highland Trend Following Fund. Still, financial stocks continue to struggle, and that remains a long-term concern for the durability of this rally, he adds.

YOU DON’T NEED TO LOOK AT NEWS footage of the Wall Street protests to know that banks are among the most hated of sectors. In the U.S., the S&P 500 financials index is the worst performer of the year, down 21%. The Stoxx European banks index is only the second-worst in Europe, but it is down a heftier 30% in local currencies. Yet, for those willing to consider financial institutions with a low profile, there are big, well-run, conservatively managed banks that can give investors a quality entree into a despised sector (Source: Barrons Online).