This stock rally wasn’t supposed to happen -- and so it did

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This was expected to be a lousy summer for the stock market, with investors taking money off the table after the big spring rally and hunkering down to await a genuine economic recovery.

And that’s often the problem when too many people have the same outlook: The market will do its best not to oblige them.

Stocks soared again Thursday, lifting the Dow Jones industrial average and the Standard & Poor’s 500 index to their highest levels since November.

Just since July 10 the S&P 500 is up 11%, as buyers have been lured back to stocks by some better-than-expected economic data and by relatively upbeat second-quarter earnings reports from a diverse mix of companies including Goldman Sachs Group, Apple Inc. and Caterpillar Inc.

On price charts, many stocks have traced patterns this month that look like rocket launches.

One of the most extreme examples: the BTK index of 20 leading biotech stocks. It’s up 24% just this week, fueled by optimism about trial results for Human Genome Sciences Inc.’s drug to treat lupus and by strong sales of Celgene Corp.’s anti-cancer drug Revlimid.

Market bulls say buyers simply have become more confident that the economy will turn up sometime in the second half and figure that if they don’t boost stock holdings now prices may get away from them.

‘A lot of people are so far under-invested, they’re really behind the eight ball,’ said Anthony Conroy, head trader at brokerage BNY ConvergEx in New York.

But the steep run-up of the last two weeks already has given plenty of market pros a case of vertigo.

‘I think we’re approaching way-overbought levels,’ said Barry Savitz, a senior partner at Greenwich Prime Trading Group in Stamford, Conn.

‘People are panicking to get in,’ Savitz said, and that suggests that a good chunk of the buying is by ‘short sellers’ who had borrowed stock and sold it, expecting prices to drop. As the rally has gained steam the shorts are scrambling to buy shares and close out their wrong-way bets.

Conroy agrees that short-covering is helping to drive the market, but he also believes that investors are placing logical bets -- particularly in the technology sector -- if the global recession is coming to an end. ‘Growth companies are what you want to buy when you have a turn in the economy,’ he said.

The question is, how significant will the turn be? With U.S. unemployment expected to remain extraordinarily high well into 2010 or beyond, market pessimists believe revenue and earnings expectations for many companies are far too rosy.

Microsoft Corp.’s quarterly earnings report, issued after the close of trading Thursday, was a reminder that all is not well. The company said second-quarter earnings plunged 29%. To get back on track, the software giant pledged to do more of what’s already ailing the economy: cost cutting.

Sal Arnuk, a principal at Themis Trading in Chatham, N.J., said he conceded that much of the news on the economy and from major companies has been brighter than investors had anticipated coming into the third quarter. But that doesn’t make him want to jump into a roaring market.

‘Rallies in general end not on bad news but on good news,’ Arnuk said. ‘We hope people who get in now have strong stomachs.’

-- Tom Petruno