Stocks have a lot to prove in the week ahead

Now it's up to the stock market to really prove it is in a sweet spot.

The Dow and the S&P 500 finished the past week at new highs, amid expectations economic data will continue to support gains, interest rates won't move much higher, and earnings will continue to improve.

"You have consumer sentiment improving. You have the economic data that's coming in pretty nicely. Obviously, the jobs data gain was pretty good. You have to think the wind is at your back," said Daniel Greenhaus, chief global strategist at BTIG. The major indexes have recovered the losses made between mid-September and mid-October.

"October and November start the best six months of the year, so you have from a seasonality stand point, you have a lot of tailwinds. People feel better into the end of the year," he said.

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Retail sales Friday is the most important piece of new U.S. data in the coming week, and economists expect it to show a headline gain of 0.2 percent and a 0.4 percent gain in retail control, which excludes autos, gasoline and building materials. There is also consumer sentiment Friday and JOLTs, job opening and layoffs data on Thursday. Big retailers, including Wal-Mart, Macy's and Nordstrom, report earnings and their comments will be watched for clues on the holiday shopping season.

"It's easy to fall into the view … that we seem to be trending here at a pace that is 'Goldilocks,' in terms of not running too hot, like today's employment report," said Mark Luschini, chief investment strategist at Janney Montgomery. He said there were some investors worried the employment report would be so strong and include wage pressure that could bring the Fed off the sidelines with an earlier than expected rate hike.

The October employment report showed a gain of 214,000 nonfarm payrolls and a decline in the unemployment rate to 5.8 percent, and no pickup in wages.

Ward McCarthy, Jefferies chief financial economist, said the lack of pickup in wages and also the low level of inflation is the next thing the markets are grappling with, now that the Fed has ended its quantitative easing bond buying and moves toward a normalization of rates next year.

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"The focus is going to shift from the growth side back to the inflation side, as far as the markets go. Both because of the data release and because the Fed still has some explaining to do," he said. McCarthy said, for that reason, comments from a flurry of Fed speakers will be important. Fed Vice Chair Stanley Fischer, Philadelphia Fed President Charles Plosser and St. Louis Fed President James Bullard are all speaking. Fed Chair Janet Yellen is also making comments at a Fed/ECB event Thursday.

Traders on the floor of the New York Stock Exchange.
Lucas Jackson | Reuters
Traders on the floor of the New York Stock Exchange.

Treasury yields slipped Friday after the jobs report, and the 10-year was at 2.29 percent. Stocks were mixed, but mostly higher for the week. The The Dow was up 1 percent for the week to 17,573, while the S&P 500 was up 0.7 percent at 2,031. The Nasdaq was up less than a 10th at 4,632, while the Russell 2000 lagged, falling less than a 10th to 1,173.

Lori Calvasina, small/mid cap equity strategist at Credit Suisse, said she expects the small-cap Russell 2000 to continue lagging.

"There's an open question over what happens next here. Typically, in years when you see large outflows from small cap funds, you tend to see the outflows persist in the fourth quarter," she said. "We're at my target. We think they're fairly valued and that's what we've been saying for the last couple of weeks."

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Small caps diverged before the market selloff this fall, and they continue to diverge, as other indexes set new highs. Calvasina said she disagrees that fund managers will chase performance into the year end, since a study of several hundred funds at the end of the quarter showed they had a lower than average cash levels.

She said the most attractive part of the small-cap universe on a valuation basis is the energy sector, which is down about 21 percent year-to-date, compared with a 1.4 percent decline in the large-cap S&P energy stocks in the same period.

Big-cap energy stocks finished the past week slightly higher after oil prices stabilized and turned higher. West Texas Intermediate was at $78.65 per barrel Friday, after dipping below $76 earlier in the week. Brent was at $83.39 per barrel, off 2.9 percent for the week.

Nat gas, meanwhile, jumped more than 11 percent for the week, as temperatures looked set to drop across the country.

Gold was volatile in the past week, and traders are watching to see if it is forming a bottom. It was at $1,169, and was down just about 0.2 percent for the week after hitting a low of $1,130 per ounce.

Traders are also watching overseas data, including the trade data expected over the weekend and industrial production and retail sales Thursday. European GDP is reported Friday.

What to watch

Monday

Earnings: 3-D Systems, Dean Foods, Gogo, Sotheby's, Ambac Financial, Caesars Entertainment, Rackspace

10:30 a.m.: Fed Vice Chair Stanley Fischer

1:00 p.m.: $27 billion three-year note auction

5:10 p.m.: Boston Fed President Eric Rosengren

Tuesday

U.S. Veteran's Day

Bond market closed

Stock market, futures open

Earnings: Vodafone, DR Horton, Fossil

7:30 a.m.: NFIB small business survey

Wednesday

Earnings: Burberry, Macy's, Beazer Homes, SeaWorld, Cisco, JC Penney, NetApp, Pinnacle Foods, Telefonica, Iamgold, Flowers Foods

3:00 a.m.: Philadelphia Fed President Charles Plosser

7:00 a.m.: Mortgage applications

10:00 a.m.: Wholesale trade

12:00 p.m.: Minneapolis Fed President Narayana Kocherlakota

1:00 p.m.: $24 billion 10-year note auction

Thursday

Earnings: Wal-Mart, Nordstrom, Tyco, Viacom, AFBiller, Kohl's, Manulife Financial, Applied Materials

8:30 a.m.: Jobless claims

10:00 a.m.: JOLTs

11:00 a.m.: Oil inventories

12:30 p.m.: Philadelphia Fed President Charles Plosser

12:45 p.m.: Fed Chair Janet Yellen welcoming remarks at Fed/ECB conference

1:00 p.m.: $16 billion 30-year bond auction

2:00 p.m.: Treasury budget

3:30 p.m.: Minneapolis Fed President Narayana Kocherlakota

4:30 p.m.: Fed balance sheet

Friday

13F filing deadline

8:30 a.m.: Retail sales

8:30 a.m.: Import and export prices

9:10 a.m.: St. Louis Fed President James Bullard

9:55 a.m.: Consumer sentiment

10:00 a.m.: Business inventories

10:30 a.m.: Natural gas inventories

4:00 p.m.: Fed Vice Chair Stanley Fischer on panel

4:00 p.m.: Fed Gov. Jerome Powell on panel