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Market Outlook: Stocks May Face Pullback Before Heading Higher

Phyllis Burke Goffney
Friday, 1 Jun 2007 | 4:00 PM ET

After another record-breaking week, stocks may face some minor pullbacks before moving even higher, many market pros say.

"I think there's a credible possibility that we could hit some bumps in the road in the summer, but right now we're in the perfect storm," Arthur Hogan, managing director at Jefferies, told CNBC.com.

Stocks have continued to get a lift from mostly positive economic news and a slew of corporate mergers and acquistions. But traders think there may be a bit of a lull for the next few weeks until companies start pre-announcing earnings near the end of the month.

"I would expect the market to trade a little bit sideways here in the summer time," said Peter Jankovskis, director of research at Oakbrook Investments. "I don't anticipate a need for a dramatic dip of 5% to 10% that some of the technical people might call for. This rising 2% to 3% at a time, there's only so long that can go on."

Trending Higher

Even if the market pulls back, most analysts remain convinced that stocks are still trending upward. The Dow Jones Industrial Average, as well as the S&P 500, finished the week at record highs. Traders welcomed strong employment and manufacturing data and shrugged off a weak first-quarter Gross Domestic Product number and a mid-week slump in China.

"This is a market that is being driven by earnings and by companies that are cash cows," said Jack Bouroudjian, principal at Brewer Investment Group. "Are we looking at a situation where good news is good news and bad news is good news? That's exactly what we're looking at right now."

"When you're in a bull market all news is good and sometimes it seems like this is a Teflon Dow, meaning nothing you throw at it will make it go down," said Hogan. "The S&P 500 trading at 17 times earnings is relatively reasonably valued and, you've got to remember, we have three billion new participants in this market in terms of the global economy."

Waiting On Earnings

Wall Street will have more economic data to pour over next week including the ISM gauge of the services sector, productivity numbers, chain store sales and trade data. While the markets may move on new data, analysts say the next big driver will likely be earnings.

"I think we'll be in a news lull until we get into pre-announcement season," Les Satlow, portfolio manager at Cabot Money Management, told CNBC.com. "I think expectations are still relatively modest, but I think they're getting a little more aggressive. The market is looking for around 7% to 8% earnings growth. That's probably up a little bit."

Some traders are also closely watching bond yields. Treasurys have posted four straight weeks of losses. On Friday, the yield on the benchmark 10-year note rose to its highest level since last August.

"As the yield on the 10-year note gets toward 5% again, it will be curious to see how the market behaves," said John O'Donoghue, head of trading at Cowen & Company. "In the face of everything that's thrown at the market, whether it's oil at $65, $66 a barrel, whether it's Chinese triple-tax stamp duty or whatever, it feels like we're just climbing and climbing and climbing."

Hold the Line

Many analysts who believe stocks will ultimately go higher from here are encouraging long-term investors to stand pat.

"Just hold the line," said Satlow. "This is a great entry point if you're talking short term. If you are long term, just be patient and wait for some consolidation before putting new money to work. This has been a good market for the index investor and the stock picker."

Satlow recently bought VeriFone, which is off of its highs from earlier this year. "On this pullback, this could be a good entry point. This is a back door play on the growth of the consumer in emerging markets."

He also likes Coach. "In the higher end of the consumer goods spectrum, you want the best of breed," said Satlow. "They have margins that are the envy of the industry and from a trend perspective, Coach is hitting its stride right now."

Peter Klein, portfolio manager at Fifth Third Asset Managment, looks for low-expectation stocks that are cheap on valuation measures. He's been buying Coca-Cola Enterprises , boat manufacturer Brunswick Corporation and pharmaceuticals giant Pfizer.

"Pfizer has a great dividend yield, a lot of cash flow and some negative press, which has depressed its price over the past few years," said Klein.

Phyllis Burke Goffney is a news editor at CNBC.com. She can be reached at phyllis.goffney@nbcuni.com.

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