Rally on? Stocks face data test

The post-Fed rally could continue in the holiday-shortened week without answering questions about the sustainability of the gains.

Markets are closed Friday for Good Friday and secondary U.S. data are the primary events in the coming days. Below-average trade volume in a holiday week could exacerbate any moves.

"There's just a lot of moving parts and the question is what bucket of the market is taking charge, and right now it seems to be the momentum players," said Daniel Deming, managing director at KKM Financial.

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Traders said the S&P 500 could rise as high as 2,080 after closing just below the psychologically key 2,050 level on Friday.

"I think the stock market now faces its real test," said Rod Smyth, chief investment strategist at RiverFront Investment. "My belief is the data will determine whether we break through this. … Our belief is the data will come through."

February existing home sales due Monday and new home sales expected Wednesday will be watched for indications on the health of the consumer.

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Besides housing data, economic releases on the calendar include the third estimate to fourth-quarter GDP, corporate profits, durable goods and Markit PMI. No major data is due out of China.

Still, the yuan and other currencies will remain in focus after the U.S. dollar index dropped following the Fed's Wednesday announcement. The recent weakness has helped commodities and emerging market assets.

The iShares MSCI Emerging Markets ETF (EEM) gained more than 2.5 percent in the past week for its first three-week win streak since October.

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U.S. crude oil futures for April settled at $39.44 a barrel on Friday after briefly topping $41 in intraday trade. The contract rolls on Monday after the settle to May, which also ended slightly lower at $41.14 a barrel on Friday.

"If oil stabilizes around current levels, it will stop being the most-focused on thing," Smyth said.

The U.S. dollar index recovered slightly on Friday but is down more than 3.5 percent since the beginning of January, on pace for its worst quarter since the first quarter of 2011.

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"The dollar and some of the other markets are still trying to interpret how the Fed is going to move and set expectations accordingly," Deming said.

On Wednesday, the Federal Reserve surprised markets by cutting its rate hike projections more than expected, down from four to two in 2016. The central bank also lowered near-term inflation PCE expectations and Fed Chair Janet Yellen remained cautious on the sustainability of recent upticks in inflation data.

"I think everyone should focus on anything that's inflation related," said Bryce Doty, senior fixed income manager with Sit Investment Associates. "There are inflection points every year, there are one to three, and this year inflation is one of them so people need to keep one ear open."

"I've been through markets when the Fed has to play catch up and it's not fun," he said. "They could be behind the curve if they don't talk about this trend in inflation."

Inflation data aren't due for at least another week, but early on Monday Eastern Time, Richmond Fed President Jeffrey Lacker is scheduled to speak in Paris on inflation expectations.

Atlanta Fed President Dennis Lockhart is due to speak later in the day on the economic outlook and monetary policy.

Other Fed talks scheduled for the week include St. Louis Fed President James Bullard on Thursday speaking about the U.S. economy and monetary policy.

"March tends to be a great month for the market, but we're going to be going into the earnings season and that's when investors have to look and see are earnings telling us a different story and the market may have to recalibrate at this point. There's only so much central banks can do," said Quincy Krosby, market strategist at Prudential Financial.

The S&P 500 and Dow Jones industrial average have both overcome 10 percent corrections to recover positive territory for the year so far. Oil is near its highest level of 2016 and the VIX around its lowest.

"All things considered, probably implied volatility is a bit too low just considering the risks we've seen manifested year to date," said Bill Merz, investment strategist at U.S. Bank Wealth Management. "While those concerns have dissipated since February, they aren't gone entirely."

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The Russell 2000, which led part of the recovery from the Feb. 11 bottom, is still lower year-to-date, while the Dow transports are up 7.5 percent year-to-date and gained nearly 5 percent for the week in their first nine-week win streak since May 2009.

"I think when everyone comes back from spring break, you'll see a change — so two weeks," said Doty.

What to Watch

Monday

Apple event

Earnings: IHS, Mattress Firm, Petrobras

4:15 a.m.: Richmond Fed President Jeffrey Lacker speaks in Paris on inflation expectations

8:30 a.m.: Chicago Fed national activity index

10 a.m.: Existing home sales

12:40 p.m.: Atlanta Fed President Dennis Lockhart speaks on the economic outlook and monetary policy.

8:30 p.m.: St. Louis Fed President James Bullard speaks on economic inequality

Tuesday

Earnings: Nike, Cintas, Red Hat, Five Below, Krispy Kreme

9 a.m.: FHFA Home Price Index

9:45 a.m.: Markit flash U.S. manufacturing PMI

10 a.m.: Richmond Fed manufacturing index

1:30 p.m.: Chicago Fed President Charles Evans speaks on economic conditions and monetary policy

6:30 p.m.: Philadelphia Fed President Patrick Harker speaks on growth and the role of economic policies

Wednesday

Earnings: General Mills, PVH, Eldorado Gold, Oxford Industries, KB Home

7 a.m.: Mortgage applications

10 a.m.: New home sales

10:30 a.m.: Oil inventories

5:30 p.m.: Philadelphia Fed President Patrick Harker gives welcoming remarks at a book launch

Thursday

Earnings: Accenture, Winnebago, GameStop

8:15 a.m.: St. Louis Fed President James Bullard speaks on the U.S. economy and monetary policy

8:30 a.m.: Durable goods

8:30 a.m.: Jobless claims

9:45 a.m.: Markit flash US services PMI

10:30 a.m.: Natural gas inventories

11 a.m.: Kansas City Fed survey

1 p.m.: Oil rig count

Friday

Markets closed for Good Friday

8:30 a.m.: 4th quarter GDP (third estimate)

8:30 a.m.: Corporate profits

*All time Eastern. Planner subject to change.