Strong stocks face earnings test
U.S. stock investors will watch the earnings numbers flow in this week to see how much momentum the rally can get from early profit reports.
The first-quarter figures come as the three major U.S. stock indexes finished a sixth straight week of gains, the best string since the rebound from 12 1/2-year lows in March 2009, and the Dow briefly popped above 11,000 late on Friday.
Those gains could make it tough for stocks to rally further, even with expectations, according to Thomson Reuters, for Standard & Poor's 500 <.SPX> companies' first-quarter earnings to rise 36.8 percent from a year ago.
Other events likely to spark attention this week: Federal Reserve Chairman Ben Bernanke testifies on the economic outlook before the Joint Economic Committee, while a plan to resolve Greece's debt crisis should boost indexes.
Euro zone finance ministers approved a 30 billion-euro ($40 billion) emergency aid mechanism for Greece on Sunday that could lift a big uncertainty hanging over global markets.
It was one of the clouds that prevented the U.S. from breaking through to new highs, so lifting this barrier will be a big positive. We have a lot of money on the sidelines globally and this could be a big catalyst to bring some of that money in, said Alan Lancz, president of investment advisory firm Alan B. Lancz & Associates Inc. in Toledo, Ohio.
The earnings period kicks off with results from Dow component Alcoa Inc
Besides Alcoa, results are expected this week from top tech companies Intel
The reaction to some of these earnings is going to be really important. If you don't get the setback, and it trades higher, I think you're going to squeeze another wave of buyers into the market, said Nick Kalivas, vice president of financial research and senior equity index analyst, at MF Global in Chicago.
While earnings are expected to be the focus, the week also brings the Consumer Price Index, March retail sales, industrial production, housing starts and consumer sentiment reports, which will help investors gauge the speed of the economic recovery.
RALLY MAY RUN INTO RESISTANCE
For the past week, the Dow Jones industrial average <.DJI> rose 0.6 percent, the S&P 500 gained 1.4 percent and the Nasdaq <.IXIC> increased 2.1 percent.
The stock market has had a very significant rise off the (February) lows, said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.
I wouldn't be surprised to see some near-term pullback within the context of a rising stock market, he said.
Much stronger-than-expected earnings have helped propel the S&P 500 more than 75 percent from the March 9, 2009, closing lows. But in the last earnings season, stocks actually lost about 3 percent as investors sold equities despite strong results.
Some 72 percent of companies beat earnings estimates in the fourth quarter, down from a record 79 percent in the previous quarter, but still well above the 61 percent in a typical quarter, Thomson Reuters data showed.
Technical indicators pointed to overbought conditions heading into this week's earnings, which could mean a pullback is in store, some analysts say.
Short-term momentum for the Dow has been deteriorating since March 23 after reaching an overbought condition, said Chris Burba, short-term market technician at Standard & Poor's.
The Dow briefly rose just above 11,000 moments before Friday's closing bell, but ended at 10,997.35, while the S&P 500 neared the 1,200 mark. Both levels represent technical resistance, Burba said.
FED CHAIRMAN, CPI AND RETAIL SALES
Bernanke is scheduled to speak on Wednesday to a congressional panel called the Joint Economic Committee. Although data continues to show economic improvement, the Fed has reiterated its commitment to keep benchmark interest rates near zero.
Also on Wednesday's agenda: the U.S. Consumer Price Index and the government's data on retail sales, both for March.
The overall CPI is pegged to rise 0.1 percent in March from a flat reading in February, while core CPI, excluding volatile food and energy prices, is also seen up 0.1 percent, matching the previous month's gain, according to economists polled by Reuters.
Retail sales are forecast to rise 1.2 percent in March from the previous month, and minus autos, sales are expected to gain 0.5 percent from February, according to economists polled by Reuters.
Thursday's industrial output is forecast to show a gain of 0.7 percent in March from the previous month.
March housing starts, due on Friday, are expected to rise to a seasonally adjusted annual pace of 610,000 from 575,000 in the previous month. Friday's Thomson Reuters/University of Michigan Surveys of Consumers report is expected to show the preliminary index on consumer sentiment at 75 for April. The index ended March at 73.6.
(Reporting by Caroline Valetkevitch; Additional reporting by Leah Schnurr and Chris Sanders; Editing by Jan Paschal and Gunna Dickson)
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