The recent selloff in stocks appears over for now and the late-week rally should continue though trading could be spiced with volatility, market analysts say.
"There still is potential that you can go up 10% or 15% more and there's still enough liquidity out there that can power this thing higher," said Tim Hartzell, chief investment officer at Kanaly Trust.
Hartzell expects stocks to continue to rise next week but continued volatility remains likely.
"The old intraday top in the S&P is 1553 so we will probably go up and visit that area," he said. "We'll go up and make a new high and chop back and forth lower. I do not anticipate this is a move that'll go straight up."
The money manager said basic materials stocks continue to look good and is "a sector you want to buy on the dips." In addition, capital goods companies such as 3M should also continue to do well, he said.
Markets Remain Resilient
The optimistic outlook comes after the market once again showed surprising resilience during a volatile week. The Dow Jones Industrial Average fell 1% on Tuesday as the yield on the 10-year Treasury rose above 5.25% for the first time in five years, then promptly rebounded about 350 points the rest of the week.
"The market has had multiple excuses to pull back," says Al Goldman, chief market strategist at A.G. Edwards. "Higher interest rates, higher oil prices, trouble in the Middle East -- yet the market is up, up and away, which means there is sideline cash waiting to float the boat and increase momentum."
"We had a 3% correction in the Dow last week but we had gone up 13% in the past seven weeks," Goldman adds. "Last week was no surprise, the only surprise was that it didn't happen sooner."
The recent selloff was an overreaction, says Charles Rotblut, senior market analyst at Zacks.com, as traders reacted to inflation data overseas followed by rapid declines in bond prices, which move inversely to yields.
"It definitely seemed like an overreaction because overall the economy is just humming along," he says. "The S&P looks reasonably valued but right now we just don't have a lot of catalysts in terms of earnings. It's kind of a quiet time until we get to July."
M&A Outlook Brightens
"I can't imagine what will drive the markets higher right now but one thing that might help everything would be a huge takeover by private equity," says Roblut. "Obviously it is impossible to predict when or if that's going to happen but some of the concerns this week were that rising rates were going to make it tougher for M&A."
A decline in bond yields increases the odds of continued mergers and acquisitions activity, agrees Alec Young, market strategist with S&P Equity Research.
"M&A has been a big driver of the rally year to date," Young said. "We're more in the benign inflation rate camp and we believe we've seen a peak, at least for awhile, in bond yields. The short-term outlook looks positive for stocks."
Tom Schrader, head of U.S. listed trading at Stifel Nicolaus, says uncertainty remains in the market, however, given a lack of corporate earnings news and the typical summertime slowdown in the equities markets.
"I don't know if this bounce will last long, next week is going to depend a lot on the economic indicators and whether or not inflation is a worry," says Schrader. "If the bond market gets a whiff of inflation they'll hit the bonds again and that doesn’t bode well for us in the equities market."
Next week, Schrader said traders are likely to focus on next Thursday's release of the latest index of leading indicators, a key forecasting gauge for the U.S. economy. Initial jobless claims and the Philly Fed index, a measure of regional manufacturing, are also on tap for next week.
Schrader also noted that currency markets and continued strength in the greenback could give the markets a lift.
'Dollar Acting Well'
"The dollar has been acting well, if it continues to rally it will support the equity market," he said.
Paul Desmond, president of trading advisory firm Lowry's Reports, said one of the classic signs of a market top is an increase in interest rates.
"We're starting to see what could be very, very early warning signs," he says.
But Desmond says it would be at least six months before he would begin to get concerned regarding a deeper correction.
"We expect this recovery to take the averages to new all time highs but we may see signs that the bull market is getting long in the tooth," he says. "You don't shift from a strong healthy bull market to suddenly a very ill bear market overnight. It's a gradual process where people slowly change their minds."
Peter Kang is a markets writer for CNBC.com. He can be reached at firstname.lastname@example.org.