Taking some mood enhancers

*** Blue chips follow the Americans

*** Chirpy Abby Cohen predicts more market hikes

*** The greenback's lack of bite...is ITV up forgrabs?...how to profit from the small-cap surge...andmore&nbsp ------------------ Small-cap stocks have surged ahead...leaving bigbrother blue chips in their wake.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The FTSE250, for example, is now a mere 100 points or 1.4% below an all-time high set in September2000. Last week the index traded 1.2% up, to close at7,049 on Friday.

The blue chip index on the other hand shed 0.7%during the week. It closed at 4,820. But why theconvergence between the FTSE100 and 250? Well, theblue chips are merely watching...and copying...theirUS index masters.

In fact, a spate of profit-taking and inflationfears shaved 0.4% off the Dow Jones last week. Theindex closed at 10,558 on Friday. The NasdaqComposite may have added 0.8% before the weekend but it still closed just down on the week. And theS&P 500 fell 0.2% last week, closing at 1,184.

Yet this second-rate start to 2005 by US indicesshould give way to plenty of positive earningsurprises. Or so reckons Goldman Sach's everoptimistic Abby Joseph Cohen. She reckons the S&P 500will rise by 12% this year, taking the index to1,325, despite America's slowing economy and profits.

'This relates to the durability of the US economicexpansion rather than the pace,' Cohen noted onFriday, while on a visit to the English capital.

MoneyWeek's response to Ms Cohen's comments? OurMoneyWeek editor-in-chief Merryn Somerset Webb saysshe's developing a grudging respect for the GoldmanSach's equity market cheerleader. After all, at thestart of almost every year since 1990 to date, Cohenproclaims that the US market is undervalued.

'She's got to be taking some kind of moodenhancer,' Merryn noted in MoneyWeek, 'given theuncertainties surrounding the global economy and thefact that the US market is quite clearly not under,but overvalued.'

Meantime, the dollar's all-bark and no-biteapproach meant it closed the week flat, at $1.310versus the euro. Lousy US trade deficit figures mayhave pushed the greenback lower last week. Yet theprospect of interest rate hikes by the US FederalReserve three weeks from now promptly pushed it upagain.

So the US now faces interest rate rises. And in theUK, a slowdown in consumer spending raises theprospect of lower interest rates here. The result?Well, expect the pound to fall against the dollar incoming weeks.&nbsp&nbsp ------------------ Bid rumours kept the market alive for much of lastweek. The London Stock Exchange hunted by bothDeutsche Boerse and Paris-based Euronext traded 4pdown at 585p. But the German's bid may be under threatas one of its investors said the Boerse should drop ittakeover. According to TCI Fund Management, the Boerseshould use the money to return around £350m to shareholderinstead.

The media sector also came under bid-fire, with ITVlooking a likely target for US private equity groupKohlberg Kravis. ITV shares traded 8% higher lastweek, closing at 115p on Friday. United BusinessMedia a potential alternative target for theAmericans, closed the week more than 1% in the black.

Mining stocks traded up, after Deutsche Bankupgraded the sector. With commodity prices lookingsteady, both Xstrata and Anglo American traded 2% upon Friday. Mid-cap group Verdanta added 3%, to tradeat 396p.

Mobile group Virgin closed at a new high before theweekend, up 7% for the week. And analysts reckonedthe group would avoid the festive slump to hit anumber of retailers this Christmas. According tobroker Cazenove, Virgin is still 20%undervalued...especially in comparison to sectorleader Vodafone.

Vodafone fell 4% over the last seven days, followingreports that it could only garner 900 new customers inflourishing Japan in December. Rivals DoCoMo nettedmore than 250,000 customers in comparison.

Yet with a heavyweight stock like Vodafone undersome pressure at the moment, what do we think willhappen to the blue chip index?

Well, ten years of global economic performance coulbe at an end this year, consultants Deloitte warnethe weekend. The consultants predicted economic growtto reach 2% this year - well below Gordon Brown's 3.5forecast.

Yet a dire economic environment does not automaticallmean a stalling equity market, we note in MoneyWeek. Infact, lower gilt yields as well as the 20% increase inearnings forecasts over the past year shows us onething: that the FTSE is heading towards the 5,000 mark,and then even higher.

As for the small-to-mid-cap surge of the past fewweeks, there are ways for investors to profit fromthe cheerful market sentiment. MoneyWeek's TomBulford reckons that a good small company willsucceed, regardless of the economic climate.

But it's still not a bad idea to avoid companiesthat rely on consumer spending. Oh, and it's as wellto dodge companies that may rely on a strong housingmarket.

Until tomorrow,

Heather D'AltoMoney Mornin