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Bulls took heart in the fact that stocks held above recent lows, but some traders were hoping to see the S&P 500 push successfully through the technically important 1,950 level. Traders noted that China was not the negative for markets in the past week that it has been, and oil did not become a drag for stocks until late in the week.
West Texas Intermediate crude for March fell 3.7 percent Friday to $29.64 per barrel, ahead of Monday's contract expiration, but it gained 0.7 percent for the week. The April contract was trading at close to $32 per barrel. Traders see $30 as an important level to hold, and staying above that would be considered a positive for stocks.
Markets are already keyed up ahead of the G-20 finance ministers meeting in Shanghai on Thursday and Friday, where there is some optimism that China and others could discuss stimulus to help the global economy. Other topics are expected to include Fed and other central banks' policy and oil prices.
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"The hope is there's more and more discussion about infrastructure spending and discussion about coordinated policy globally," said Rick Rieder, chief investment officer of global fixed income at BlackRock." I think there was more intensity around that."
The management of China's currency is also expected to be a topic of discussion, after the Asian nation first allowed the yuan to fall rapidly during the summer and subsequently raised concerns about further devaluation.
"The difference between this week and two weeks ago is China. This week has been pretty stable. The Chinese currency has been relatively stable. Much less talk about capital flight," said Rieder.
Win Thin, senior currency strategist at Brown Brothers Harriman, said his expectations for the G-20 are low, but that he would also be watching for follow-up in Europe after U.K. Prime Minister David Cameron secured an EU renegotiation package late Friday that he said is enough to recommend that Britain remain a part of the European Union.
"We wouldn't expect too much of the G-20. I'm pleased with how China has come back. They're saying the right stuff and the market's been pretty calm. We are in a nice, uneasy calm," he said.
Thin said a new focus for markets may now be the surprise pickup in some U.S. economic indicators, including that inflation rose more than expected in the core CPI. Industrial production was also stronger than expected, as were retail sales and the January employment report.
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"People are saying no tightening. But maybe the next shoe to drop is people are going to say the U.S. is doing well and the Fed is going to start tightening," he said.
That could make the words of the more than half-dozen Fed speakers key in the week ahead. Fed Vice Chair Stanley Fischer speaks Tuesday evening, and he has recently said the central bank remains on its rate-hiking path but that it is data dependent. St. Louis Fed President James Bullard speaks Wednesday, and he has surprised markets with comments that the central bank maybe should hold off.
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Rieder said the Fed may in fact be forced to hold off, but because of developments outside the U.S.
"I thought the Fed should have gone a while ago, and I think it's going to be very difficult, where the global economy is slowing. I think it's hard for the Fed to tighten in that environment," Rieder said.
The improving data, if they continue, may also reduce some of the talk about a U.S. recession. JPMorgan said its model showed recession risks ticked down to 31 percent from 32 percent in the past week.
Daniel Suzuki, Bank of America Merrill Lynch equity strategist, said improving U.S. data could be a catalyst for a rally if they continue. BofA cut its 2016 expectation for the S&P 500 to 2,000 from 2,200 last week.
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"In our view the market started to price in a global recession and our estimate at the market low was it was pricing in a recession probability of 50 percent. Some of that's been priced out, and we're probably pricing in 30 to 35 percent," said Suzuki. He said a negative, however, has been a tightening of credit conditions, and high-yield debt could continue to struggle.
Suzuki said durable goods could be important in the week ahead. "I think an improvement in the orders would give some support to the idea that you're seeing improving trends within the manufacturing economy ... I think the more (positive) indicators you get, the more the market will price out a recession and the trend continues," he said, adding there are still issues. "Particularly with ISM under 50, there's still reason for concern."
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Suzuki said a positive sign for the rally was the large equity outflows in the past several months, but a negative is that the earnings estimates trend continues to be for reduced expectations.
Suzuki said one positive sign may be coming from the behavior of small caps, which he said are trading in line with large caps for the first time since 2003.
"Small-cap underperformance peaked in 2011 and during that time period they underperformed by 30 percentage points," he said, noting they are now trading in line on a forward price to earnings basis. He said the historical average premium of small caps relative to large caps was 5 percent since 2011.
"Now that premium is zero. They went from a premium of 27 percent or more in 2011. Now they're both at 15.8 percent. At the record difference, small caps were trading at 17.7 percent times while large caps were trading at less than 14 times," he said.