Market Insider

Published: Friday, 7 Aug 2009 | 8:55 PM ET

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Wall Street's bull could take a breather in the week ahead, but the trend for stocks remains higher, for now.

Stocks in the past week gained another 2 percent as improved reports on employment and manufacturing activity confirmed expectations the economy is showing signs of recovery.

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Treasurys came under selling pressure, driving yields higher, and the dollar finished the week firmer.

In the week ahead, investor focus will be on the Treasury market and dollar as much as the Fed's two-day meeting midweek and a heavy calendar of economic reports.

Retail sales are released Thursday, and there are just a few major earnings reports, including Wal-Mart and several other chain stores.

"I suspect the market is going to retrace a little bit next week. I would be surprised if it didn't," said Tim Smalls of Execution LLC. "People keep saying there's a lot of money on the sidelines, waiting to come into the stock market. I'm not so sure. I think you need to have some kind of pull back, and then more people come into the market."

Another record round of Treasury auctions is scheduled for the coming week and could prove a disadvantage for stocks if rates continue to rise.

The yield on the 10-year reached 3.852 percent Friday on better economic news and concerns about the looming Treasury issuance, which includes $75 billion in notes and bonds and billions more in short-term bills.

Rising Rates

John Spinello, Treasury strategist at Jefferies, said the supply will likely pressure the bond market enough to push rates on the 10-year to 4 percent, a widely watched level it last touched in June.

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The Treasury plans to auction $37 billion three-years Tuesday; $23 billion in 10-years Wednesday, and $15 billion in 30-years Thursday.

"It's the supply pressure, the sentiment change about the economy, and the concern about foreigners not participating in the auctions," said Spinello.

Spinello, however, doesn't think the rise in rates will necessarily stall the equities markets as it did in June.

"Rates can go up and stocks can go up at the same time," he said.

Pimco senior strategist Tony Crescenzi said it's likely the economic news will continue to improve, a bearish trend for the Treasury market.

Friday's July employment report, which showed a smaller-than-expected decline in non-farm payrolls, reinforces the trend.

"There has been no interruption in the improving tone of the data and so long as that is the case, trends in markets will be held in tact.

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The more the economic and financial conditions improve and yields rise, the more the risk asset classes, stocks and corporate bonds, will pay attention to the rise in interest rates," he said.

Even so, rising rates could be their own undoing.

"When you think of how the other asset classes might behave, that could truncate any rise in interest rates," he said.

The stock market will certainly be sensitive to any rise in interest rates, said James Paulsen, chief investment strategist with Wells Capital Management.

"These are exactly the things that cause the market to consolidate. I would also say 4 percent this time is not as damaging as 4 percent was last time because we're no longer losing 500,000 jobs a month," he said.

Paulsen said he is watching weekly jobless claims data Thursday to see if it reinforces the trend of slowing job losses seen in July's employment report.

"Could the market pull back some? Could it consolidate some? Sure. It surely will at some point here. But I'll be darned if it's now or if does it at 1100," said Paulsen.

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