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The VIX, a gauge of investor anxiety, dropped this week despite unrest in the Middle East and oil prices are basically unchanged from two weeks ago. After posting its best week in the past nine, the S&P 500 has actually seen oversold levels tick lower.

"I expect the market to continue to rally despite the fact the economic news is sluggish in the jobs front," said Michael Yoshikami, chief investment strategist at YCMNet Advisors in Walnut Creek, California.

Government data showed Friday the U.S. economy created 36,000 jobs in January, far less than expected, but the unemployment rate fell to its lowest since April 2009. Economists agreed a recovery in the labor market was proceeding but not gaining speed.

Upbeat signals in the economy, coupled with a positive bias in the current earnings season, should continue to propel equities higher.

More than 70 percent of the S&P 500 companies have reported earnings above estimates so far, according to Thomson Reuters data. Investors expect aggregate earnings rose 37 percent in the last quarter, the highest estimate for that period in more than 10 months.

"We believe corporate earnings will continue to recover as companies are more efficient and economies bounce back," Yoshikami said.

FEW HURDLES AHEAD

The energy, industrials and technology sectors are "trading well into overbought territory," according to a report from Bespoke Investment Group. But two recent weeks of declines are helping ease overall selling pressure, and the rally that started in September shows no signs of weakness.

"This market has been really eating up resistance levels as an every week event," said John Kosar, director of research at Asbury Research in Chicago. "We targeted 1,313 for this week as a near-term inflection point, and we haven't broken it yet."

The target coincides with the benchmark's highest level in August 2008. Chartists have mentioned the 1,360 area, the 76.4 retracement of the S&P's downhill move from late 2007 to March 2009, as one of the few technical hurdles the index faces before hitting 1,400.

The S&P has risen 25 percent since the start of September, which has led to a lack of confidence and calls for a pullback. Still, the CBOE volatility index .VIX fell 20.5 percent this week after a near 30 percent spike in the two previous weeks.

"There's a healthy degree of skepticism and many people are still calling for a correction," said Richard Ross, global technical strategist at Auerbach Grayson in New York.

THIN DATA CALENDAR

Next week is slow in terms of economic indicators, with the preliminary reading of the Reuters/University of Michigan consumer sentiment as the highlight of the week.

Treasury said China's yuan should rise more quickly but said it lacked evidence to label Beijing a manipulator, a designation that could trigger trade action.

"Treasury's view...is that progress thus far is insufficient and that more rapid progress is needed," the report said. "Treasury will continue to closely monitor the pace of appreciation of the (yuan) by China."

The finding was no surprise and came in a long-delayed report to Congress that Treasury kept under wraps until after a state visit by Chinese President Hu Jintao last month.

One lawmaker said on Friday he would propose legislation next week aimed at forcing China to revalue its currency.

Treasury Secretary Timothy Geithner has been trying to prompt China into letting the yuan -- also known as the renminbi -- rise more swiftly, something that is seen as vital for rebalancing global growth.

A higher-valued yuan would make imports cheaper for Chinese consumers and encourage Beijing to seek more growth through domestic consumption than through exports.

Other countries including Brazil have similarly expressed unhappiness at the impact on their domestic industries from cheap Chinese imports. Geithner is visiting Brazil on Monday and has a chance to seek an ally for making the case at the Group of 20 meeting in Paris later this month that China should speed up yuan appreciation.

JOBS LOST, FACTORIES CLOSED

The decision in the semi-annual report, which was due last October 15, disappointed and angered lawmakers.

"China has been given a free pass on its currency practices for far too long," said Max Baucus, chairman of the Senate Finance Committee, which has jurisdiction over trade issues. "We need to hold China and our other trading partners accountable for their actions."

Democratic Rep. Sander Levin of Michigan said he would reintroduce legislation next week proposing to let the Commerce Department treat an undervalued currency as a subsidy under U.S. trade law. Companies could, on a case-by-case basis, seek countervailing duties against competing Chinese imports.

U.S. manufacturers have long complained that Beijing keeps the yuan deliberately undervalued in order to gain an unfair trade advantage that has put millions of American out of work.

China contends the yuan's value is not the main cause of the United States' mounting trade deficits and that if the currency did appreciate swiftly the effect would only be to shift production from China to other lower-cost countries.

The United States had a trade deficit of $252 billion with China during the first 11 months of 2010. Some of the largest U.S. retail chains source the vast majority of their products from Chinese factories.

Pacific Investment Management Company's (Pimco) chief executive, Mohamed El-Erian, told Der Spiegel that Greece's only way out of its debt crisis was for Europe to reduce Greek debt from 140 percent of gross domestic product (GDP) to 90 percent.

"Debts should fall under 90 percent of GDP," said El-Erian, who helps oversee more than $1.1 trillion in investments. "The people cannot withstand (the current savings program)."

El-Erian said international investors would only return to Greece once the economy was growing sustainably again. Athens could afford "to take a time-out from the euro" to achieve this, before joining the common currency bloc once again when it was on a more competitive footing, he said.

El-Erian said on Friday he was not yet buying Greek, Irish or Portuguese sovereign debt.

In the magazine interview, El-Erian also warned that the United States' current expansionary fiscal and monetary policies could drive inflation worldwide.

Instead, the U.S. should brace itself for "long-term weak growth, high unemployment and a new configuration of the world economy," he said.

(Reporting by Sarah Marsh)

Signs of improvement in the economy and strong corporate earnings have propelled stock prices, but tapering volume, meager gains and declining numbers of advancing stocks pointed to waning buying interest at the end of the week.

January's employment data had a limited impact as job creation was weak but the unemployment rate fell sharply.

Sectors that have posted strong gains recently, such as energy, materials and industrials, showed signs of profit-taking as investors shifted to consumer discretionary and technology shares.

"The market has been getting more selective and the rotation is important," said Wayne Kaufman, chief market analyst at John Thomas Financial in New York. "I'm not sure people have it completely figured out yet."

Networking shares were among the leaders after JDS Uniphase

(JDSU.O) posted strong earnings. Its stock rose almost 30 percent and bolstered hopes for strong results from Cisco Systems (CSCO.O) next week.

The Dow Jones industrial average .DJI rose 29.89 points, or 0.25 percent, at 12,092.15. The Standard & Poor's 500 Index .SPX added 3.77 points, or 0.29 percent, at 1,310.87. The Nasdaq Composite Index .IXIC climbed 15.42 points, or 0.56 percent, at 2,769.30.

For the week the Dow rose 2.3 percent the S&P 500 rose 2.7 percent and the Nasdaq gained 3.1 percent.

The S&P's energy sector .GSPE, which has gained the most this year, was among the biggest losers on the day, falling 0.3 percent. Dow component Chevron Corp (CVX.N) dropped 0.2 percent to $97.11.

Consumer discretionary shares .GSPD rose 0.7 percent after recent signs of life in the consumer. Shares in online retailer Amazon.com Inc (AMZN.O) climbed 1.3 percent to $175.93. Consumer shares have lagged the rally since the start of the year.

Strength in technology helped push the Nasdaq to new 3-year highs after the index posted its best week since mid-September, but the move was not broad-based as declining stocks came in just ahead of advancers.

Shares of JDS Uniphase and other optical component makers jumped a day after the company posted solid quarterly results, helped by ever-increasing demand for higher bandwidth in smart phones, tablets and other applications.

JDS Uniphase shares rose 26.9 percent to $22.76.

"The strength in the technology sector today and strong earnings from JDS Uniphase potentially have people bulled up on the prospects of a positive earnings surprise from Cisco next Wednesday," said Steve Claussen, chief investment strategist at online brokerage OptionsHouse LLC.

Despite the conflicting signals in the Labor Department's report on Friday, economists agreed a job market recovery was proceeding apace if not gaining speed. Many investors also saw the data as a sign of strength. Government bonds sold off, while the dollar rallied against the yen and the euro.

The payrolls gain reported by U.S. employers was a quarter of the 145,000 gain economists had expected. But a separate household survey, which is used to determine the jobless rate, showed nearly 600,000 more people reported they were employed.

That surge pushed the unemployment rate to 9 percent from 9.4 percent in December. It has dropped 0.8 percentage point since November, the biggest two-month decline since 1958.

"The payroll details and the drop in unemployment signal that there is an underlying improvement in the labor market buried under the snow and ice," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

Still, the decline in the jobless rate is unlikely to discourage the Federal Reserve from completing its $600 billion government bond-buying program to support the economy.

Fed Chairman Ben Bernanke on Thursday sounded a more upbeat note on the economy, but said "it will be several years before the unemployment rate has returned to a more normal level."

Economists estimated that blizzards, which pounded the Northeast in January and buried cities in knee-deep snow, reduced payrolls by between 50,000 and 100,000.

Signs of underlying strength in the labor market were also yielded by revisions to November and December payrolls, which showed 40,000 more jobs created than previously estimated.

The U.S. Treasury debt sell-off pushed the spread between two-year yields and 10-year yields to an 11-month high. Stocks on Wall Street were little changed in mid-afternoon.

JOBS MIGHT BE UNDERSTATED

Though the Labor Department's payroll count continues to show moderate growth, independent surveys have suggested a pick-up in the pace of job creation, raising concerns that the government might be missing growth coming from new businesses.

Labor Department chief economist Betsey Stevenson told reporters the count was likely falling short, just as faulty estimates of how many companies were created or destroyed led to an understatement of job losses during the recession.

"It's a challenge for the establishment survey to be able to accurately record the number of businesses that are starting up and the number of businesses that are shutting their doors," Stevenson said.

"Now that we are in a recovery it's most likely, but we won't know for sure until next year, that we are missing a lot of businesses that are opening their doors and that we're over estimating the number of business that might be shutting their doors."