updated 1/6/2006 9:54:49 AM ET 2006-01-06T14:54:49

Stocks managed to extend their New Year’s rally to a third session Thursday, edging higher in erratic trading as the tech sector rebounded on bullish news from chip maker Xilinx Inc.

Major Market Indices

The day’s fluctuations signaled that investors wanted to catch their breath after a strong start to the year. The Dow Jones industrial average gained more than 160 points the previous two sessions, and the Standard & Poor’s 500 index reached a 4½-year high Wednesday.

Many strategists say the market’s 2006 advance should continue.

“It still feels like people are thinking that stocks are still cheap relative to bonds,” said Phil Schlakman, head of global sales trading at JP Morgan Private Bank. “At this moment, sentiment still feels good, and I think there’s room for stocks to rally further.”

The Dow Jones industrial average wavered throughout the session, closing up 2 points, or 0.02 percent, while the broader Standard & Poor’s 500-stock index added 0.02 point and finished almost unchanged. The technology-rich Nasdaq Composite index gained 13.41 points, or 0.59 percent.

Bonds fell slightly, with the yield on the 10-year Treasury note at 4.36, up from 4.35 Wednesday. The dollar rose against most major currencies, while gold prices lost ground.

Strong economic news failed to move stocks substantially. The Institute for Supply Management’s index of service sector activity came in at 59.8 for the month, topping the 59 reading forecast on Wall Street as well as November’s 58.5 reading. In addition, the Labor Department reported that first-time claims fell by 35,000 to 291,000 last week, a five-year low.

The big debate for the year: Whether stocks are cheap or expensive. Price to earnings ratios have fallen as stock prices stayed still although corporate earnings were strong. Still, looking at trailing earnings, the price-to- earnings ratio for the S&P 500 is still higher than historic norms, according to Merrill Lynch & Co. The S&P’s price-to-earnings ratio is currently 16.4, compared to a norm of 14.

“We expect that a cyclical decline will unfold in 2006,” Richard T. McCabe, Merrill Lynch’s chief U.S. market analyst said in a note earlier this week.

Crude oil prices fell. A barrel of light crude settled at $62.79, down 63 cents, on the New York Mercantile Exchange. While high oil prices pressured stocks for much of 2005, Schlakman said the economy’s resilience to those increases has assured investors in recent months.

Wall Street punished retailers, although overall sales were modestly higher . Wal-Mart Stores Inc. fell 63 cents to $45.69 after reporting that its sales for stores open at least a year, known as same-store sales, rose just 2.2 percent in December, at the low end of analysts’ estimates.

Target Corp. fell 16 cents to $54.49 after posting a 4.7 percent same-store sales hike, slightly better than Wall Street’s forecasts. Costco Wholesale Corp. fell 30 cents to $49.78. Sales at the chain increased 7 percent, but international sales increases outpaced those in its U.S. stores.

Tech stocks rallied as programmable chip maker Xilinx raised its third-quarter revenue forecasts thanks to strong global sales. Xilinx rose $1.62 to $28.55, while fellow chip makers Intel Corp. rose 36 cents to $26.27 and Advanced Micro Devices Inc. rose $1.12 to $33.68.

Google Inc. rose $6 to $451.24 after The Wall Street Journal reported the company plans to announce an agreement to sell video downloads from the National Basketball Association and CBS, a direct challenge to Apple Computer Inc.’s video sales for iPods. Apple fell 59 cents to $74.38 on the news.

Overseas, Japan’s Nikkei stock average rose 0.39 percent. Britain’s FTSE 100 fell 0.41 percent, Germany’s DAX index lost 0.13 percent, and France’s CAC-40 dropped 0.07 percent.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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