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Bulls Struggle to Smash S&P Record, Even as Economy Improves

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Economists are boosting their outlooks for U.S. growth, but the stock market seems to be stalling after months of gains on expectations for a better economy.

Analysts say the market may have already priced in a rosier view, and that's one reason why the S&P 500 has not raced toward its all-time high.

Meanwhile, the Dow 30 has broken through its highs and has since seen nine record-setting sessions. Stronger-than-expected retail sales data Wednesday had a number of economists raising their forecasts for first quarter GDP, to as high as 3 percent, but those forecasts were tempered by expectations the second quarter could see the drag from spending cuts in Washington and higher taxes.

The Dow gained five points Wednesday to 14,455, while the S&P booked a two point gain, to end at 1554 -- 11 points below its all-time high.

"The line of least resistance is higher, but the market really did nothing today," said Steve Massocca of Wedbush Securities. "1556 and change has started to become a place of resistance on the S&P. Three days in a row we rallied to that level and backed off."

Sam Stovall, chief U.S. equities strategist with S&P Capital IQ, said most records are not made in the first run, so he expects the S&P 500 to pull back before charging at the 1565 level. Traders are also focused on the intraday record of 1576.

"History would say that we should probably see some sort of a minor digestion of gains, meaning a three to five percent decline which then should be followed by a more severe decline once we truly establish a new all-time record," said Stovall.

The market's slow grind higher is torture for bulls and bears, he said. "Every day, we keep hitting a new recovery high. It's two points here, it's three points there. For someone on the sidelines waiting to get in at a lower level, this is painful stuff," he said.

Looking for Bad News

Analysts have been waiting for a pull back, and they are on the lookout for bad news. For Massocca, it could come from Europe and he is watching bond auctions there. Spain holds auctions Thursday.

For Jack Ablin, CIO at BMO Private Bank, it could come from China, and he worries the government there will take actions that curb growth. Ablin said while there's potential for a pullback, he doesn't expect a big sell off until it looks like the Fed could change its posture on easing.

"To me, as long as the Fed stays where it is, I think there's the risk of a melt up. I'm staying in, even though we've passed my target for the year," he said. He said there's a risk that at some point good economic data may be taken as a signal that the Fed's policy of quantitative easing are coming to an end. Most economists expect the Fed to continuing purchasing mortgage and Treasury securities under the program, into next year.

Retail sales in February rose 1.1 percent, the best gain in five months, and double what was expected. While the number was pumped up by a jump in gasoline prices, economists saw it as a sign of consumer resilience in the face of rising prices at the pump and the two percent tax increase from the end of the payroll tax holiday. The number follows a stronger-than-expected report of 236,000 non-farm payrolls in February.

(Read More: Consumers Still Strong, Just Keep on Spending)

"The stock market is a forward-looking entity so a lot of the good news we're now getting is the reason the market went up for the past nine weeks. I don't' know if it means we're running out of steam. You're going to have to show continued improvement...That's really the name of the game here," Richard Bernstein, CEO of Richard Bernstein Capital Management.

Bernstein said the market's slow, low-volatility move higher is what should be expected while the Fed adds tremendous liquidity.

"People are looking at the absolute numbers and saying they're still weak, but the stock market moves on better or worse, not on the absolute numbers," he said. "We favor consumer stocks and financial stocks, but the normal progression now would be to start to move into mid-cycle stocks, and the mid-cycle stocks would be industrials and to a lesser extent technology."

For Bernstein, bad news for the market could come from Washington. "It could be the sequester. I don't think anybody really knows what affect it will have on the economy. People will start getting laid off. The question is will the market look through that and look at private sector payrolls, or look at total payrolls," he said.

Deutsche Bank economist Joseph LaVorgna raised his forecast for first quarter GDP Wednesday to 3 percent from 1.5 percent. He raised third quarter to 3 percent from 2.5 percent, and fourth quarter to 3.5 percent from 3 percent, but his second quarter number was raised to just 2.3 percent from 2 percent.

Mesirow Financial chief economist Diane Swonk raised her first quarter forecast for GDP growth to 2.5 percent, and her fourth quarter forecast to 3.2 percent, but for the second quarter, she sees just 1.6 percent growth.

"This was supposed to be a turning point year…fiscal drag was less than thought from the fiscal cliff. The question is how much do we get from the sequester," she said. The sequester is automatic spending cuts, amounting to about $42 billion in 2013, that were triggered after Congress failed to come up with a deficit reduction plan. The cuts are half from the defense department.

What to Watch

The data on deck for Thursday includes weekly jobless claims, current account and PPI, all at 8:30 a.m. ET. There is a $13 billion 30-year Treasury auction at 1 p.m.

The Fed releases its rulings on bank capital plans at 4:30 p.m. Banks will learn if they are able to make capital distributions.

Treasury Secretary Jack Lew tours Siemens manufacturing facility in Atlanta, Ga. Lew will be talking to CNBC's Steve Liesman in "Closing Bell" at 4:15 p.m.

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