As markets close at new records, focus shifts to consumers
Some traders are convinced the stock market is on auto-pilot, poised to move higher into the year-end, and the week ahead may provide more proof of that.
That's not to say the market isn't feeling a bit toppy. The Dow and S&P 500 ended Friday at record highs, both closing in on big, round numbers: 1,800 on the S&P and 16,000 on the Dow. The Nasdaq too was within reach of 4,000, a level it hasn't achieved in 13 years.
The S&P closed out a sixth week of gains, up 1.5 percent to 1,798, its longest winning streak since February. Those big round numbers could be a draw, attracting investors who have lost out on the market's gains and keeping others who aren't ready to take profits.
"I would not underestimate the psychological elements of investing," said Laszlo Birinyi, founder of Birinyi Associates. "The resilience of the market is good. … My goal a couple of weeks ago, I said 1,820 over the next three to six months, and now it looks like the next three to six weeks."
The consumer is a big focus in the coming week, as Home Depot and a number of other retailers, such as Target, Best Buy, J.C. Penney and Gap report earnings. There is also the government's retail sales report, and keyexisting homes data, both on Wednesday. The week will also be peppered with a heavy dose of Fed speeches, including an address by Fed Chairman Ben Bernanke before the National Association of Business Economists on Tuesday night.
The Senate Banking Committee is expected to confirm Fed Vice Chair Janet Yellen to take Bernanke's place in the next week, before passing it on to a full Senate vote. Yellen's debut before the Senate panel for herconfirmation hearing this past week, set a positive tone for stocks, as tradersviewed her to be dovish and unlikely to bring a swifter end to Fed easing programs.
"The message of maintaining monetary accommodation was loud and clear, and that certainly helped the market. That's an important driver," said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management. "The Fed has been such an important component for the market even thoughI'm not in the camp to say it's all Fed. The Fed has provided the grease for the economic engine."
Yellen's dovish tone also tempered some of the move higher in Treasury yields, following the stronger than expected October jobs report Nov. 8. The 10-year yield was at 2.71 percent late Friday.
While the stock market has been flashing some warning signals, like more boisterous sentiment, stocks keep trudging higher. "The market's come a long way, but we still like it. …The path of least resistance continues to feel higher, and I think we'll get, just as we have in the past few years, these bouts of concerns, but it's two steps forward and one step back," said Grohowski. "There's a lot of conservative positioned portfolios that had been waiting all year for the 10 percent pull back that we never had."
Grohowski doesn't see a correction coming this year, but there could be one on the horizon early next year. "I do think if the fighting [in Congress] comes back so early in the new year, it's just going to add to some selling pressure that's going to be there because of deferring of capital gains. I do think you will see an unusual amount of gains taken early in theyear because there are unusually high gains and there are higher taxes to payon them." For many investor portfolios, there aren't a lot of losses to offset the gains, he added.
Grohowski has a target of 1,900 to 1,950 on the S&P 500 for 2014. "If we do get closer to 1,900 before the start of the year, we'll probably make an asset allocation shift and not just a rebalancing. I think what's more likely is what we are now having—this kind of mini melt-up into the year-end," he said. Grohowski said investors still have plenty of dry powder, in high cash accounts, noting the $2.6 trillion in money market funds, off just slightly from the $2.71 trillion at the beginning of the year.
"I'm wondering if the January effect will be challenged this year," he said. "It's going to be Happy New Year and let's start beating each other up with the debt ceiling debate. [As for] the January effect, maybe we should be enjoying it with our Thanksgiving turkey. There's a feel good in the market that's not going to be interrupted but once people are thinking about the new year, I think you've got those deferred gains, and the you've got the debt ceiling debate that's going to start getting on the front page."
Scott Redler, who follows the short-term technicals of the market, said this one has been especially tough on bears, repeatedly forced to cover shorts. One positive this week was a rebound in financial stocks,which were up 1.3 percent. "Most traders had one foot in the door and one foot out. The bears had the power last Thursday. They lost it Friday with the jobs report, and when the market opened lower around 1,760 Wednesday, that was their chance," he said.
But instead the market powered higher. "It gets harder to stay with it. It gets harder and harder as the percentage increases add up and each milestone gets eclipsed. We're at 1,800. What's next? Could we see 1,820 to 1,840 by year-end? Possibly, but how you're maneuvering it could be tricky," Redler said.
Week of the consumer
Thanksgiving week is the official start of holiday shopping but with a shorter period than normal between the Thanksgiving holiday and Christmas, and the overlap of Thanksgiving and Hanukkah, holiday shopping is already in focus and so is the consumer.
So the comments of retailers on the holiday season, as they report earnings will be key, after the conflicting positive view of Macy's this past week and the cautious tone of Wal-Mart.
As for the government retail sales report, Pierpont Chief Economist Stephen Stanley said he expects a gain of 0.1 percent, excluding autos and flat, for the headline. "I think retail sales are going to be lackluster, pretty close to flat," he said. "Yesterday's productivity numbers show the compensation numbers aren't growing very fast. No wonder people aren't spending much."
Stanley also said existing home sales Wednesday could be soft. "I think they'll be down quite a bit. The consensus has them close to flat, but I think we could be down closer to five million. The mortgage rate rising is a part of it but I think the bigger issue in terms of affordability is just how fast prices have risen."
The troop of Fed speakers in the coming week will also be important for the markets as traders attempt to assess when the Fed might wind down its $85 billion monthly bond purchases. Stanley said Yellen has made it clear it would not be soon, and he expects to hear the usual disagreement among Fed officials over when the program should end when they speak this week.
But Bernanke will probably not make much news in terms of policy, when he speaks Tuesday evening, he said.
"I get the sense that he's already stepping back. Since the press conference, he's said very little, if any policy reference," Stanley said. "I think he's trying to ease the transition by fading into the background and allowing her to move into the foreground. He may say stuff that the markets pay attention to, but I doubt he sends a policy signal."
Earnings: Tyson Foods, Salesforce.com, Urban Outfitters, UGI, Amerigas Partners, Brocade, Semtech
9:00 a.m. Treasury international capital flows
10:00 a.m. NAHB survey
12:15 p.m. New York Fed President William Dudley on regional economy
1:30 p.m. Philadelphia Fed President Charles Plosser on economic outlook and monetary policy
5:45 p.m. Minneapolis Fed President Narayana Kocherlakota on "too big to fail"
Earnings: Home Depot, Medtronic, Best Buy, Campbell Soup, Dick's Sporting Goods, TJX, Trina Solar, Valspar, La-Z-Boy
8:30 a.m. Employment cost index
2:15 p.m. Chicago Fed President Charles Evans
7:00 p.m. Fed Chairman Ben Bernanke speaks at the annual National Association of Business Economists dinner
7:00 a.m. Mortgage applications
8:30 a.m. CPI
8:30 a.m. Retail sales
10:00 a.m. Business inventories
10:00 a.m. Existing home sales
10:00 a.m. New York Fed's Dudley on for-profit institutions in higher education
12:10 p.m. St. Louis Fed President James Bullard on economy and monetary policy
2:00 p.m. FOMC minutes
8:30 a.m. Jobless claims
8:30 a.m. PPI
8:58 a.m. Manufacturing PMI
9:45 a.m. Fed Gov. Jerome Powell on over-the-counter derivatives
10:00 a.m. Philadelphia Fed survey
10:00 a.m. Leading indicators
12:30 p.m. Richmond Fed President Jeffrey Lacker on economy
12:50 p.m. St. Louis Fed's Bullard on economy and monetary policy
4:30 p.m. Money supply
4:30 p.m. Fed's balance sheet
Earnings: Foot Locker, Ann, PetSmart
08:40 a.m. Kansas City Fed President Esther George on banking supervision, Paris
10:00 a.m. JOLTS job openings survey
11:00 a.m. Kansas City Fed survey
12:15 p.m. Fed Gov. Daniel Tarullo
—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.