Fed by new optimism about the economy, Wall Street bulls are likely to continue their record run in the week ahead.
Four years after hitting bottom in the financial crisis, the Dow soared to a new high in a bank-led rally in the past week, and traders now expect bulls to charge ahead toward the S&P 500's all-time closing high of 1565 in the not too distant future.
Retail sales and inflation data stand out in a relatively light data calendar in the coming week. Traders are also watching $66 billion in Treasury auctions after a dramatic jump in rates took the 10-year yield to 2.06 percent by Friday, an 11-month high. The Treasury auctions 3-year notes Tuesday, and longer-dated 10- and 30-year bonds Wednesday and Thursday.There are few corporate earnings reports, with Costco among them.
"We go from a catalyst-rich week to a catalyst-light and that happens often, but what doesn't happen often is new highs, so it's hard to say what the next catalyst is," said Art Hogan of Lazard Capital Markets. "If you look at sentiment coming out of the week, you have much more of a shift, whether it's kicking or screaming or capitulation. The 'wait for a pullback buyer' has turned into 'the train is leaving the station buyer.'"
A surprisingly strong employment report, showing 236,000 jobs created in February, put some steam under stocks and lifted the dollar Friday. The Dow was up 2.2 percent for the week to 14,397, giving it a near 10 percent gain for the year so far. The S&P 500 jumped 2.2 percent to 1551, and the Nasdaq was up 2.4 percent to 3244. The small-cap Russell 2000 rallied 3 percent to 942.
The S&P has been up nine out of the last 10 weeks. The S&P financial sector, up 3.4 percent was the best performer, after government stress-test results showed that most major institutions could withstand a severe recession. Banks should stay a focus in the week ahead, as the Fed's ruling on individual bank capital plans will be released Thursday after the closing bell.
(Read More: Stress Tests 'Just Not Very Stressful' for Banks)
The strong monthly jobs report immediately sparked talk Friday that the Fed could pull back on quantitative easing because of an improvement in the employment picture, but Fed watchers disagree. Barclays chief U.S. economist Dean Maki says he expects the Fed to keep its asset-purchase program in place into next year. The Fed is buying $85 billion a month in Treasury and mortgage securities, and the program is widely credited with lifting stock prices.
"It was a solid report. I think that there's a risk people over-interpret it, in that the February figures mean we now transition to a new phase of labor-market recovery," he said. "If I look at the three-month average gain, it's at 191,000. In last month's report that number was 200,000. We have to balance upside surprise in February with downside surprise in January." The drop in the unemployment rate to a four-year low of 7.7 percent was also due to fewer workers looking for employment.
"Earlier in the recovery, the unemployment rate was falling one percent a year, and now over the past year, its fallen a half percentage point," he said.
(Read More: Will Fed Tighten Now? Don't Hold Your Breath)
Retail sales on Wednesday will be an important look at how the consumer, particularly at the lower end, is handling the dual headwinds of higher taxes and higher gasoline prices. "We're looking for more softening in the core retail sales. We're looking for only a 0.1 rise, same as last month."He also expects consumer spending to soften to about 1 percent for the quarter — half of the fourth-quarter level.
Maki expects the Consumer Price Index, released Friday, to come in at an above-consensus 0.7-percent rise. "It's a gasoline-increase story, and we think core (without gasoline) prints at 0.2 percent," he said.
Citigroup chief U.S. equities strategist Tobias Levkovich said the market has a ways to run, but he sees risks as the second half of the year approaches. Saturday marks the four-year anniversary of the market bottom, when the S&P hit an intraday low of 666.
He said stocks were helped by Congress last week pushing concerns about a budget battle into September, from an earlier March deadline on the continuing resolution to fund the budget. But that issue could heat up in the fall and weigh on the market.
There is also potential for U.S. corporate earnings to reflect more of the weakness in Europe, with about 12 percent of revenues for the S&P 500 companies coming from Europe. Stronger U.S. data may cause the market to react to the idea that the Fed will stop its extraordinary policy easing, but Levkovich does not believe the market's rally has been liquidity driven.
"If economists are right that we're kind of pacing more like three-percent growth in the second half, there will be a lot of discussion around when does the Fed pull back," he said. "There's not just going to be a reaction to the Fed (meeting) minutes, there will be a real debate on Wall Street about it."
Even with these concerns, he expects the S&P to rise above 1600, but he doesn't think the market's climb into record territory will be the catalyst. "I don't think hitting some arbitrary numbers is that important…But the economy improving is," he said.
Levkovich said some investors have the mindset that "at 666, it was the devil's number, I would never touch it, but at 1566, I would buy."
(Read More: Cramer: Market Has 'Great Faith in Bernanke')
What About Bonds?
George Goncalves, Nomura Americas Treasury strategist, said he expects bonds to consolidate in the week ahead, after the past week's surprisingly steep rise in yields, and inverse drop in prices.
"The auctions, I think, will be a litmus test, as they always are. Especially after a week where NFP (nonfarm payrolls) and ADP (private sector jobs report) are strong, you see investors a little bit worried about taking down supply. It just means rates will be sticky at the upper end," he said.
Goncalves said while bond prices moved lower and stocks rose in the past, there were no signs of the "great rotation" of money out of bonds into stocks, as some analysts have been expecting. "Two weeks ago, we had bad news, and this week we had good news. (Treasurys) ebb and flow with the news,not so much the fundamentals. They're an instrument between flight-to-safety,and 'risk on, risk off,'" he said.
He said it's too early to say that yields are on a longer-term upswing. "If the S&P can make new highs, and keep them for the rest of the month and April, then we could be looking at higher yields in the summer," he said.
What to Watch
Earnings: Dick's Sporting Goods, Urban Outfitters, CVREnergy
0730 am NFIB
1000 am JOLTs Job Openings
0100 pm $32 billion 3-year auction
Earnings: Express, Men's Wearhouse
0700 am Mortgage applications
0830 am Import prices
0830 am Retail sales
1000 am Business inventories
1030 am EIA oil inventory data
0100 pm $21 billion 10-year auction
Earnings: Ulta Salon, Aeropostale, Krispy Kreme
0830 am Weekly jobless claims
0830 am PPI
0900 am Fed Gov. Sarah Raskin at NeighborWorks Symposium
1030 am Natural gas inventories
0100 pm $13 billion 30-year bond auction
0430 pm Fed's capital review of banks
0830 am Empire State manufacturing survey
0900 am Treasury international capital flows
0915 am Industrial production
0930 am Dallas Fed President Richard Fisher speaks
0955 am Consumer sentiment