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Jobless Claims Are the Next Test for Rally

David De Lossy | Photodisc | Getty Images

For a market that got pumped up because a so-so monthly jobs report wasn't a disaster, Thursday's weekly jobless claims will be a big event.

Economists expect to see 335,000 claims when the number is reported at 8:30 a.m. ET, up from last week's 324,000, a more than five year low.

"We think they'll actually be lower - 330,000 - and I think that will get people excited about a recovery in May employment, and whether that happens or not, it will still get people excited," said Joseph LaVorgna, Deutsche Bank chief U.S. economist. LaVorgna said a number under 350,000 would be a positive, and that level of claims would be consistent with monthly job growth of about 200,000.

(Read More: Banks (Finally) Ready to Start Lending Money Again)

Stocks finished higher Wednesday, with the Dow and S&P 500 both hitting new highs. The Dow rose 48 to 15,105 and the S&P 500 rose 6 to 1632. Stocks have gained about a percent this week so far, after rallying to record levels Friday on April's better than expected employment report. There were 165,000 nonfarm payrolls added in April, and sharp upward revisions were made to February and March reports.

The jobs report was strong enough to show the economy is not as bad as some feared, but soft enough to keep the Federal Reserve easing. Jobs are a key metric for the Fed, and it reaffirmed last week that it will continue with a zero rate policy and its program of purchasing Treasurys and mortgage securities.

Sell in May?

Even though some strategists believe the market can avoid its typical May sell off this year, the debate continues.

(Read More: Better News Keeps the Rally Going)

Jack Ablin, CIO at BMO Private Bank, for one, says it's quite possible a sell off is coming, and it has made him a little cautious. "I'm not going to be as quick to buy the dip as other people will be. It's only a six months strategy. Maybe if we can look beyond the six months, it's not the end of the world," he said. Ablin has a 1520 target on the S&P 500 for year end, and he's not yet ready to change it. "I would like to see some fundamental change. Really nothing has changed."

Ablin said the 'sell in May' adage does have history on its side, and it certainly was a trend that made an impact in the past three years, when stocks began selling off in April and recovered in the fall.

One positive he does see in the market is the recent switch in leadership from defensive sectors, like utilities and telecom, to cyclicals, like industrials, materials and tech companies.

(Read More: Slower Consumer Credit as People Use Plastic Less)

"I am encouraged by that shift, and we now just need some follow through," he said.

"It seems like equity buyers are coming back into the market. These just aren't bond substitutes any more. From that perspective, it's good, and maybe we can move past this notion of 'where else can you invest.' That made me uncomfortable. Maybe there's this sense we're seeing a lift in the second half. I don't know. Certainly, we have challenges here at home," he said.

Besides jobless claims, wholesale trade is reported at 10 a.m. and chain stores report monthly sales throughout the morning. Thomson Reuters forecasts a 4.3 percent increase in sales for the stores it follows, in part due to the timing of Easter.

There is also a $16 billion 30-year bond auction at 1 p.m. Natural gas inventories are released at 10:30 a.m.

(Read More: Here's What Is Really Behind Home Price Gains)

There are several Fed speakers Thursday, including Richmond Fed President Jeffrey Lacker, at 8 a.m. on the topic of too big to fail, at the Council on Foreign Relations in New York. Chicago Fed President Charles Evans makes the opening remarks at 9:25 a.m. at the Chicago Fed's 49th annual conference on bank structure and competition. Fed Chairman Ben Bernanke speaks at that conference Friday.

Philadelphia Fed President Charles Plosser speaks at 1:15 p.m. in New York on the economy.

Earnings are expected from Agrium, Apache, Cablevision, Carlyle Group, Dean Foods, Dish Network, Precision Castparts, Sony, Echostar, Visteon, and Windstream ahead of the open. Priceline.com, Public Storage, Great Plains Energy, Nvidia, and Westar Energy report after the closing bell.

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.