Keeping the rally going

NEW YORK (CNNMoney.com) -- After working through the first big scare for stock market bulls in 3 months, Wall Street seems to be back to buying mode. But should it be?

"It's one of those situations where the stock market is too euphoric, but you have to go with it for now because it's the trend," said Chris Johnson, chief investment officer at Johnson Research Group.

The three major gauges rallied last week, gaining for three sessions in a row as falling bond yields and mild readings on inflation helped soothe investor worries that the Federal Reserve will have to boost interest rates this year.

In the previous week, worries that the Fed might have to raise rates to combat a fast-growing economy and higher inflation had sent Treasury yields surging to a five-year high - and sent each of the major gauges down 3 percent or more overall over a 3-day span, the worst selloff since February.

However, the stock selloff wasn't just about inflation and rate worries. It was also about investors taking a rest after a rally that had pushed the Dow Jones industrial average (up 85.75 to 13,639.48, Charts) and the S&P 500 (Charts) to all-time highs and the Nasdaq composite (Charts) to a 6-year high.

After a week or so of losses, stocks recovered, and bounced with a vengeance, staging a 3-session rally, thanks to falling bond yields and mild inflation readings on consumer and producer prices.

All that is well and good, suggesting that the upward trend that has lifted stocks for months is in place. The only problem is that if inflation is not going to be a big problem going forward, why are crude oil prices at a 9-month high? And if oil, gold and other commodities are surging, should investors be taking a more cautious approach?

"In the short run, the momentum is there, but it bothers me that people are so euphoric," said Donald Selkin, director of research at Joseph Steven. "Oil prices keep going up and at some point the piper is going to have to be paid."

Selkin said that while last week's May inflation numbers were positive, oil prices have risen $3 or $4 a barrel so far in June and are expected to keep rising through the summer, which could make upcoming inflation readings more worrisome.

Crude oil for July delivery ended Friday's session at $68 a barrel, a 9-month high.

"We're far from out of the woods on inflation," Johnson said.

Selkin said he was also concerned that some of the stock sectors leading the market higher suggested higher inflation, such as energy stocks, metals and mining.

In addition, while the Treasury market seems to have stabilized, "to say that the rush of higher yields is over would be premature," Johnson said. "This is one of the key issues the market is staring down."

These broader issues will likely add to what is already expected to be a typically volatile summer. However, on the bright side, there is little on tap in the week ahead to trigger these concerns.

A light week for economic news is highlighted by reports on housing starts and building permits. (See chart for details.)

A few earnings reports are set to trickle in, including electronics retailers Best Buy (Charts, Fortune 500) and Circuit City (Charts, Fortune 500), as well as package delivery firm FedEx (Charts, Fortune 500) and financial behemoth Morgan Stanley (Charts, Fortune 500). (See chart for details.)