Wall Street's 7-year-old bull could slow after sharp rally

As Wall Street's bull market turns 7 years old in the week ahead, analysts say it may have run a little too far and too fast in the last several weeks.

The market is also more likely to be driven by events outside the U.S. than within in the coming week. There is little U.S. data, with import prices and trade the biggest items. But the European Central Bank's Thursday meeting has been looming large over world markets for weeks. Traders expect the central bank to offer a new dose of stimulus and possibly even more negative, negative yields.

There are also Chinese foreign reserves data Monday, trade data Tuesday and inflation data Thursday, as the Chinese National People's Congress meets.

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Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

China is one of the biggest factors for risk markets in the coming week, and there could be positive headlines on stimulus from the NPC. "People don't expect anything that's anything but helpful for risk assets from China this week," said Alan Ruskin, head of G-10 currency strategy at Deutsche Bank.

Stocks were higher for a third week, with the S&P 500 finishing at 1,999, its highest close since early January. The S&P, up 2.7 percent for the week, has had its best three-week streak since early December. The S&P has gained about 10 percent since bottoming on Feb. 11, and is clawing its way back from a peak to trough decline of about 15 percent.

"I think the real story here is the massive jump in stocks in the last three weeks, and the change is probably mostly behind us," said Jonathan Golub, chief equity strategist with RBC Capital Markets. "It can't keep going crazy like this, but really the story from here is we need volatility to decline. Basically the things that reversed — oil, interest rates, volatility — that whole renormalization. We want it to move forward at a slower pace and in a way that's more systematic."

The market's quick run is showing some signs of exhaustion. The volume Friday was the highest since Feb. 11. "The risk to being short is probably 20 points to the upside on the S&P 500, but the risk of initiating new longs here is probably 70 to 100 points to the downside. This is not a good spot to get long, but to probably trim positions into the overbought strength," said Scott Redler, partner with T3Live.com. Redler watches short-term technicals, and he said the market is now overbought by the same amount as it was oversold by when it bottomed on Feb. 11.

On Wednesday, the bull market turns 7, and the S&P 500 has risen about 200 percent since it plummeted to 676 on March 9, 2009, in the heat of the financial crisis. Just a few weeks ago, pessimism ruled and some traders were betting the S&P could fall into bear market territory — a 20 percent decline.

"It squeaked by. … The S&P 500 never got there. It lives to fight another year," said Russell Koesterich, global chief investment strategist at BlackRock.

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Koesterich said he expects the rally to run out of steam in the near term, and while gains should not be large this year, the market can move higher. "We're in the back half of the bull market, and the back half of the bull market is often accompanied by more volatility, but I don't think it's over yet," he said. "I don't think this is going to be a year of double-digit gains. I think people have to have modest expectations of where we are in the bull market. I think you're going to make more money in stocks than cash, and I think the bull market can continue."

A batch of better than expected U.S. data, including Friday's February job gains of 242,000, has helped dash expectations that the U.S. economy is heading into recession, and that has helped lift stocks. Also helping was a strong move higher in crude, up more than 4.5 percent for the week. West Texas International crude futures closed above $35 Friday, a key psychological and technical level traders had been watching.

"We're (the S&P) almost flat on the year. Oh, what a difference a bottom in oil and a little bit of recovery in economic expansion can make. At least the economy stopped getting worse just around the time oil bottomed," said Gina Martin Adams, institutional equity strategist with Wells Fargo Securities. "This is still a case for further upside. But what we have to see is earnings recover. … The reality is the market started breaking down when earnings started breaking down. Earnings need to recover to justify a major uptrend in stocks."

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As for the week ahead, "Monetary policy is arguably the biggest risk in the market. Monetary policy officials do seem to have a heavy hand influencing markets," she said.

"We do think (the ECB) is going to cut interest rates further into negative territory, and add new wrinkles to their QE program," said Ethan Harris, co-head global economic research at Bank of America Merrill Lynch. "On the other hand, they don't have any big weapons to deliver. It's another small step down the path for the ECB. I think it's a good thing for global markets if the ECB manages this process well and is able to get a positive story out of it. … It's a another piece of the puzzle of this reversal in markets. The markets are feeling less negative about everything."

Koesterich said investors remember the ECB's December meeting when it failed to deliver the expected easing. "You think about disappointment with the ECB. That reverberated," said Koestrich. In the past week, the expectations for more quantitative easing, or asset purchases, picked up after the euro zone reported a decrease in inflation. "In Europe disinflation is a real threat, and … given the reaction to the (Bank of Japan) and concerns about what negative rates mean for banks, I think the composition of whatever package they unveil is going to be important. It's not just about stimulus."

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The Bank of Japan's introduction of negative yields last month spooked markets, in part because of worries about the impact on banks. "I think the most market friendly number would involve some market expansion of QE," said Koesterich.

As for U.S. data, Harris said the most important U.S. report will be import prices Friday.

"If you look at the inflation outlook in the U.S., one of the big stories here is how much deflation we are importing. Imports are about 15 percent of GDP," he said. "Import prices have been incredibly weak due to the strong dollar. However, the pace of decline in import prices is becoming less dramatic," Harris said last month, consumer import prices fell by 0.6 year over year. "That's less deflationary than in the fall when we were getting 1.3 percent year over year. … That means you're getting half as much imported deflation."

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What to Watch

Monday

12 p.m. Fed Gov. Lael Brainard on economy

1 p.m. Fed Vice Chairman Stanley Fischer on economy

3 p.m. Consumer credit

Tuesday

6 a.m. NFIB survey

1 p.m. $24 billion 3-year notes auction

Wednesday

10 a.m. Wholesale trade

1 p.m. $20 billion 10-year notes auction

Thursday

European Central Bank meeting

8:30 a.m. Weekly claims

10 a.m. QSS

1 p.m. $12 billion 30-year bonds auction

2 p.m. Federal budget

Friday

8:30 a.m. Import prices