Is it game over for the recession? Or will consumers stay in hibernation?

Investors will watch this week's new home sales and consumer data to see if the economy's recovery is on track and whether the rally in U.S. stocks -- now at 2009 highs -- will continue.

On Friday, Wall Street got more confirmation that the economy is on the mend with a report showing existing home sales in July rose 7.2 percent -- the fastest pace in nearly two years and a sign that housing is pulling out of a three-year slump. The data, combined with stronger-than-expected second-quarter earnings, pushed the Standard & Poor's 500 and the Nasdaq to the highest levels since last October.

So the report on new home sales for July, due Wednesday, is likely to get more scrutiny than usual from investors who want proof that the rally has been driven by more than hope for an economic turnaround.

What we've seen so far has been data signaling that it's the end of the recession, said Kevin Caron, market strategist at Stifel, Nicolaus & Co in Florham Park, New Jersey.

This week's data will be very important in determining if these trends are artificial, or if they're sustainable, Caron added.

Other major indicators on this week's economic calendar include consumer confidence, durable goods orders, GDP, personal income and consumption, and consumer sentiment.

For the past week, the Dow Jones industrial average <.DJI>ended up 2 percent, the S&P 500 <.SPX> gained 2.2 percent and the Nasdaq <.IXIC> climbed 1.8 percent.

Stronger-than-expected second-quarter earnings have helped bolster stocks over recent weeks. The S&P 500 is up about 11 percent since July 1.

Of the 480 companies in the S&P 500 that have reported second-quarter results so far, 73 percent beat expectations, while 9 percent were in line with expectations and 19 percent were below forecasts. That compares with 61 percent of companies beating expectations in a typical quarter, according to Thomson Reuters.

For the year, the Dow is up 8.31 percent, while the S&P 500 is up 13.60 percent and the Nasdaq has risen 28.15 percent.

But their gains from early March are even more impressive. From multiyear closing lows set on March 9, the Dow has gained 45.2 percent and the Nasdaq has advanced 59.3 percent.

The S&P 500 is up 51.7 percent from its 12-year closing low on March 9.

HOME SWEET HOME

Single-family home prices for June, due from the Standard & Poor's/Case-Shiller home price index on Tuesday, are forecast to rise 0.2 percent, which would confirm May's surprising turnaround.

New home sales in July are expected to rise to an annual rate of 390,000 units, according to economists polled by Reuters. June's new home sales came in at an annual rate of 384,000 units. Coupled with Friday's better-than-expected existing home sales figures, optimism about the housing market could continue stocks' advance.

We got a terrific existing home sales number and I hope to see follow-though (from) the Case-Shiller data, said Phil Orlando, chief equity market strategist at Federated Investors in New York.

If the data continues to improve, then the bears who have been very wrong (during this past rally) are really gonna have to throw in the bone now, he said.

HEY, BIG SPENDERS

Factors that could dampen the market's buoyance and reverse its direction are weak consumer sentiment and a lack of spending.

About 70 percent of GDP is derived from consumer spending. So the economic recovery will depend on consumers resuming their love affair with the retail sector. The government will take a second look at second-quarter GDP on Thursday. Economists polled by Reuters believe that GDP contracted at an annual rate of 1.4 percent in the second quarter, exceeding the initial estimate of a 1 percent decline.

The U.S. consumer confidence index for August will be released on Tuesday by the Conference Board, a New York-based private research group. The Reuters poll called for an index reading of 47.5, up from July's slide to 46.6, which was substantially below expectations.

Consumers are still pretty hunkered down, said Scott Wren, senior equity strategist at Wells Fargo Advisors in St. Louis.

The U.S. Commerce Department will release July numbers on U.S. durable good orders on Wednesday. The Reuters forecast calls for overall durable goods orders to rise 3.2 percent in July after June's worse-than-expected drop of 2.2 percent.

The Reuters/University of Michigan Surveys of Consumers will give a final reading on August consumer sentiment on Friday. The Reuters poll calls for a reading of 64, down from a preliminary figure of 66.0, which was the lowest since March.

Also on Friday, personal income and consumption figures for July will be watched for what they say about how much consumers are saving rather than spending.

Quarterly earnings from high-end jeweler Tiffany & Co could shed some light on whether affluent consumers are shopping again -- or keeping a tight grip on their wallets.

Just a handful of S&P 500 companies will report results this week, but the whole spectrum of the retail sector -- from the ultra-bargain segment represented by Big Lots and Dollar Tree Stores to such back-to-school destinations as office supplies store Staples and teen outfitter American Eagle -- will be represented.

Stronger-than-expected earnings so far have proven companies' ability to plump up their bottom lines by cutting costs.

But more growth needs to come from increased revenue, analysts say. If consumers do not return to stores, the market may have celebrated too soon, said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California.

The market's putting the cart before the horse, trying to convince (itself) that the recovery exists. (But) the emperor has no clothes, he said. The consumer will not come back. The consumer is dead.

With the three major U.S. indexes gaining between 7 percent and 9 percent over the past five weeks, stocks seem ripe for a pullback. But analysts argued that the amount of cash on the sidelines is substantial enough that good economic data could spark another run-up, with momentum coming from investors chasing the market.

Those portfolio managers who have missed the rally have got to look for an opportunity to put that cash to work, Orlando said. So any pullback is likely to be muted.

(Reporting by Rachel Chang; Editing by Jan Paschal and Caroline Valetkevitch)

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