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Stocks on shakier ground as indexes diverge and bond market chokes

October 10, 2009 |  6:30 am

A victory celebration isn’t much fun if you’re there all alone.

The Dow Jones industrial average closed at a new 2009 high on Friday, but without the company of any other major U.S. market index.

It'll be a bad sign for the seven-month-old rally if the other indexes can’t make their own new highs next week.

The Dow rose 78.07 points, or 0.8%, to 9,864.94 on Friday, surpassing the previous 2009 closing peak of 9,829.87 reached on Sept. 22. The index now is up 12.4% for the year and 51% from its 12-year low in early March.

Friday, by the way, was the two-year anniversary of the last bull market's peak.

Nysefloor The blue-chip Dow leading the way, without broader indexes staying with it, is akin to the battlefield scene of a general advancing to the top of the hill -- only to find his troops far behind. Good luck keeping that hill, general.

Still, the broader market also climbed Friday, and most other indexes are within easy striking distance of this year’s highs, which most also reached on Sept. 22. The market went into only a modest swoon after that, still defying the bears who say it’s way overdue for a sharp pullback.

The Standard & Poor’s 500 added 6.01 points, or 0.6%, to 1,071.49 on Friday, just below the Sept. 22 close of 1,071.66.

The New York Stock Exchange composite inched up 0.4% to 7,015.54, which left it within 0.5% of its Sept. 22 close.

Among small-stock indexes, the Russell 2,000, which rose 1.2% to 614.92, will need to gain another 1% or so to take out the Sept. 22 high.

In June, divergences among the major indexes signaled the top of the spring rally. The NYSE composite, for example, peaked on June 2. The Russell 2,000 topped out on June 4. The Dow was the last to hit a new rally high, reaching 8,799.26 on June 12. After that the market pulled back through July 10, with the Dow losing 7.4% in all, before buyers rushed back into the market beginning in mid-July.

Second-quarter earnings reports fueled the summer rally, and the bulls are betting that third-quarter reports will power the market in the next few weeks.

Stocks could face one other big hurdle: a back-up in interest rates.

The bond market was hit by a selling wave late this week as the steep drop in yields in recent months finally triggered a buyers' strike. Momentum traders who've been riding the bond rally quickly bolted for the door. They got an extra push courtesy of more warnings by Federal Reserve policymakers that short-term interest rates will, some day, rise from zero.

The 10-year Treasury note yield ended Friday at 3.38%, up from 3.25% on Thursday and 3.18% on Wednesday.

Yields also jumped in the California municipal bond market this week after the state was forced to boost rates on an offering of new tax-free debt to get the deal done.

Rising market yields push down the value of older bonds, which is reflected in falling share prices of bond mutual funds. The share price of the Vanguard California Long-Term Tax Exempt bond fund, which hit a 52-week high of $11.39 on Monday, had fallen 1.1% to $11.26 by Friday.

That's not a big loss compared with what the stock market might suffer in a week. Still, for bond investors who've been watching the value of their holdings rise almost non-stop since July as cash has poured into the market, this week was a rude reminder that it's possible to lose money in bonds, too.

-- Tom Petruno

Photo: On the NYSE floor on Friday. Credit: Mario Tama / Getty Images