New York ? No wonder investors are so giddy about the stock market lately: It’s human nature to let good news supersede that which could be potentially bad.

A surge since late October has lifted the market’s major indexes to levels not seen in three years, leaving a decidedly bullish tone on Wall Street. Fueling that climb: retreating oil prices and strong earnings, which seem to be giving investors plenty of reason to buy.

But their focus on today’s happenings rather than tomorrow’s prospects raises some questions over whether this rally can last. Maybe for some investors, that doesn’t matter right now.

Stocks started off strong this year, but then got stuck in a narrow trading range that lasted until about two months ago. Things changed after oil prices fell from their record high of $55.17 a barrel in late October. Crude oil futures now are trading around $45 a barrel.

Also helping to drive shares ahead was the quick resolution to the presidential election, with the business-friendly Bush administration securing a second term in office.

The Standard & Poor’s 500 stock index and the Dow Jones industrial average both have gained about 10 percent since late October, while the Nasdaq composite index has shot up nearly 13 percent in that time.

There are plenty of strategists tracking the market who believe that this positive turn has staying power. Their view is that lower oil prices should help consumer spending, thus boosting the economy’s pace, and even though most see earnings growth slowing next year, companies still have strong balance sheets and solid cash cushions should they run into tougher times.

“Our perspective on this market is that it is firing on all cylinders and has no indication of hitting a top,” said Richard A. Dickson, senior market strategist at Lowry’s Research Reports in Palm Beach, Fla. “This trend in motion will stay in motion until something big happens to cause it to reverse.”

Proceed with caution

But that sentiment certainly isn’t embraced by all, and some market-watchers are more cautious about their look ahead — and think that investors should be, too.

One concern is that investors are being somewhat shortsighted by just seeing the positive effects of falling oil prices, and not considering that the economic stimulus caused by that decline could spur the Federal Reserve to become more aggressive in its tightening of interest rates.

“The current environment may very well prove to be one of short-term gain and long-term pain,” Francois Trahan, chief investment strategist at Bear, Stearns & Co. Inc., wrote in a recent note to clients.

There also is potential trouble with the falling dollar, which sank to a record low against the euro this year and tumbled against other major currencies. A weak dollar already is spurring foreigners to pare down their holdings of U.S. Treasury securities and there is great worry over whether that will ultimately lead them to retreat from holding equities, too.

A big debate looms over the slowing pace of earnings growth. When the numbers are tallied for 2004, 17 of the 24 industry sectors in the S&P 500 are expected to show double-digit earnings growth, and that’s only forecast to drop slightly next year.

But as Morgan Stanley U.S. market strategist Henry McVey points out, that “optimism seems somewhat inconsistent” with real gross domestic product growth expected to slip from its projected 4.4 percent pace this year to about 3.7 percent in 2005.

And even if these factors aren’t weighing on investors right now, there is some worry that all their recent buying may trump what has historically happened in January, long considered the busiest time for stock purchases all year.

January buying

That “January effect,” as it is called, generally happens because investors sell underperforming shares — mostly small- and mid-cap stocks — in December for tax purposes, and then resume their buying during the first weeks of January. The Nasdaq composite index, for instance, has delivered positive returns 70 percent of the time in January and has had an average January rise of 3.76 percent over the last 33 years, Trahan said.

But the recent wave of buying has gotten some market-watchers wondering if the “January effect” is taking place earlier than usual this year. Nasdaq already has surpassed the levels it usually reaches by the end of January, which Trahan said was something that investors should “bear” in mind.

Of course, no one really knows what is driving investors to buy, and no one really knows if this party-like atmosphere will soon end. Like every day on Wall Street, they just need to remember to somehow hedge their bets.