Rally could spell pullback for stocks
A pullback could be on the table next week for stocks after their best weekly performance in two years, especially if a raft of data headlined by the June jobs report doesn't bolster the argument of a strengthening economy.
Stocks rose for five straight days as the fog of the Greek debt crisis appeared to once again be lifted while better-than-anticipated economic numbers such as Friday's manufacturing data gave weight to the belief the U.S. economy was starting to recover from a soft patch.
What we are looking at is a market that is going to focus on the economic numbers, said Peter Cardillo, chief market economist at Avalon Partners in New York.
We had real good gains toward the end of the quarter so it wouldn't surprise me to see a little bit of profit taking before we get those numbers out during the course of the week.
Data expected for next week includes factory orders for May, the ISM services index and several indicators on the labor market, including Friday's report.
It is a little bit early to declare victory over the mid-cycle slowdown we've had, said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.
On Friday, you have payrolls, unemployment rate -- the big Kahuna -- and there might be some trepidation going into it, especially with the market having already rebounded sharply here over several days.
Even with the economic data on the docket for next week, volume is expected to remain light due to the market holiday on July 4th, which could exacerbate swings in the market.
Aside from the additional spike in volume brought about by the final reconstitution of Russell Investments by its indexes on June 24, average weekly volume has been among the lowest of the year for several weeks.
BULLS AND THE BUDGET DEFICIT
The light volume may prove to be an advantage for the bulls, however, especially after the S&P 500 <.SPX> successfully bounced off the 200-day moving average, a key technical support level, and jumped back over the 50-day moving average, which represented a resistance point.
The mindset is an opportunistic 'risk on' trade and it is giving a lift to the market in spite of the fact that most people are scratching their heads. But that is what happens, particularly when there is very light volume, momentum dictates trend, and that is what we find ourselves in, said Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey.
For the week, the Dow Jones industrial average <.DJI> rose 5.4 percent, the S&P 500 gained 5.6 percent and the Nasdaq Composite Index <.IXIC> climbed 6.2 percent -- marking their biggest weekly percentage gains since July 2009.
With Greece and the European debt crisis once again pushed to the back burner in the minds of investors, the focus has shifted to the rapidly approaching deadline for Congress to reach an agreement on the debt limit, presenting another headwind for stocks.
The U.S. Treasury on Friday kept up the pressure on Congress to strike a deal to raise the debt ceiling and prevent a default, repeating that it would run out of legal room to borrow on August 2.
The big thing on the horizon is now back to the U.S. deficit issues, said Rick Meckler, president of LibertyView Capital Management in New York.
The Greek (debt) situation was an appetizer for that, and I think you're going to see a lot of back and forth as people wonder how much brinkmanship is actually going to be played with the budget deficit.
Another overhang could be evident in the preannouncement of corporate profits before earnings season begins with Alcoa Inc's
We have had a soft patch in the economy here due to higher commodity prices, a little bit of weakness in the manufacturing side, because of Japan, Europe, China and various things. All that can really impact Q2 earnings and we may see some negative preannouncements, and that might really have a broader impact on the overall market, Ghriskey said.
(Reporting by Chuck Mikolajczak; Additional reporting by Edward Krudy; Editing by Jan Paschal)
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