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The Week Ahead: Rally Onward—or Roll Over?

As the first quarter earnings season begins, a debate rages over whether stocks will be able to rally on or instead roll over on weak corporate profits and dismal economic news.

AP

Traders have argued for several weeks now that the current rally, which started in early March, is a bear market rally and will soon fade. Instead, it has defied naysayers and brought in buyers looking for a turn in the U.S. economy later in the year.

"What is happening in the market was likely to happen. You had a deeply oversold condition. You didn't know what the sparks would be. You had a dried out forest, and you just needed some kindling. Then you had a number of them," said Tobias Levkovich, chief U.S. equities strategist at Citigroup.

"My sense is the earnings numbers are going to be very poor, but who does not expect that," he said. "So, it gives you some idea, I think, that we've got some legs still, and to some extent many, many people have missed it."

In the coming week, first quarter earnings kicks off with a report form Alcoa on Tuesday. A handful of other reports are due during the week, including Bed, Bath and Beyond Tuesday, and Constellation Brands and Family Dollar Wednesday. Chevron gives an interim update on Thursday.

From 'Mad Money':

The economic calendar is fairly light, and the release Wednesday of minutes from the Fed's last meeting is one of the more important items. Also on Wednesday, the Securities and Exchange Commission considers restoring the uptick rule or other price measure. The uptick rule could allow short sales only when the last sale price of a stock was higher than the previous. Some investors believe the SEC's reversal of the rule in 2007 allowed short sellers to unfairly drive stock prices lower.

From 'Fast Money':

Chain stores provide a window on the consumer's recent activity when they report March sales Thursday.

Markets Mayhem

Stocks finished their fourth up week with a gain of more than 3 percent, scoring their longest winning streak since October, 2007. The Dow, up 241 at 8017 in the past week, was up 21 percent in the past four weeks, its best move of that duration since May, 1933. It was also the Dow's first close above 8,000 in two months. The S&P 500 rose 26 points, or 3.3 percent for the week, to 842. The Nasdaq rose 76 points, or 5 percent to 1621.

Investors last week poured money into the financials, which were best performers with a 6.4 percent gains, but they also bought consumer discretionary stocks, which gained 6.3 percent. Defensive issues were the worst performers, with health care down 1.6 percent and consumer staples down a slight 0.1 percent.

Crude oil was up fractionally and grains and some metals rallied in in the past week as the dollar index lost about a percent. But there was also some interesting action in the Treasury market, where traders bucked up against the Fed's buying program and the promise of more new issuance. In the coming week, tens of billions of dollars in 3-year and 10-year notes will come to auction.

"My assessment of it is the whole Treasury complex is adjusting itself to the consequence of traction from the Fed and the budget situation," said Kevin Ferry of Cronus Futures Management. Treasurys were under selling pressure. On Friday sellers dumped the 10-year, which saw its yield rise to 2.909 percent from 2.753 the day earlier.

WHERE ARE STOCKS HEADED?

Whither Stocks?

Levkovich said he expects the S&P to hit 1,000 by year end, but that move could come sooner and even fade by then depending on what the economy does.

"We've been arguing for awhile that we'll be looking for the potential of some very fierce rallies, but we're not looking for another bull market," said Levkovich. He said the average bear market rally is about a 42 percent move up, and in the bear years of 1974 to 1982, there were six major trading rallies that averaged 32 percent returns. "The idea we can have big market returns during poor economic times is borne out by history," he said.

Levkovich said the first quarter earnings period may be an opportunity because while first quarter numbers could be ugly, companies may say that the second quarter is not so bad. For instance, Research in Motion upgraded its outlook for the current quarter when it reported earnings Thursday.

More From CNBC.com

"People are aware the numbers are going to be pretty poor. To a great extent that's priced into the markets. Auto sales, to housing numbers to ISM, there are some signs of improvement, but these are not good numbers. They are just not as bad as expected, and that's good for equities," he said.

Levkovich said companies have also undergone a massive inventory "de-stocking," and while that trend continues, demand should pick up. so production could also increase. "The context is you continue to take down inventory, but at a much more modest pace. But that's consistent with some increase in production...It's a positive, and this is one of the reasons we believe we're going to have a rally that's going to continue. Our sentiment indicators are negative. A lot of people are skeptical, and from a contrarian point of view, that's also a positive," he said.

Anecdotally, he said he understands there was heavy selling by retail investors during the worst of the February sell off. "I would suspect that retail investors will sell as stocks go up because they have no confidence, and that would be positive news because you have more and more cash on the sidelines, building to support gains," he said.

For Investors:

Sectors Levkovich favors include diversified financials and insurance, retail. semiconductors and energy. "We do have long positions in a number of areas like transportation as well ... it's too late to play defense, " he said.

Econorama

There is just short list of data in the holiday-shortened week. Consumer credit is reported Tuesday; wholesale trade is on Wednesday, and weekly jobless claims are reported Thursday. International trade data and import prices are released Thursday. The stock market and bond market are closed for the Good Friday holiday, and the bond market closes early on Thursday.

API oil data is released Tuesday at 4:30 p.m., and IEA oil data is reported at 10:30 a.m. Wednesday.

Minneapolis Fed President Gary Stern speaks Thursday in South Dakota, and Kansas City Fed President Thomas Hoenig speaks that day in Oklahoma.

Questions? Comments? marketinsider@cnbc.com

  • 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.

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