Stocks could surf higher on a wave of late summer momentum in the week ahead though volume should be extremely light.
With earnings season over, there is a series of economic data focused on housing, consumer sentiment and manufacturing in the coming week. Also of high interest will be the weekly jobless claims report Thursday, after the last two reports showed larger-than-expected numbers of new unemployment claims.
The Treasury also auctions a near record $200 billion in notes and bills, and traders will be watching the energy markets where oil bubbled to its year high in the past week and natural gas slumped to a 7-year low.
Stocks this month have defied bears, who have been prowling for a pull back. The market gained about 2 percent in the past week, even with a bout of selling early in the week. The Dow finished at 9505, up 2 percent or 184 points, its highest close since Nov. 4. The S&P rose 22 or 2.2 percent to 1026, its highest close since Oct. 6.
"Everybody wants to go short because they think the market is so overbought, but they just can't because of the momentum," said one trader. Traders are now focused on September as a possible time for the market to give back some of its gains. They argue economic news is not that good, and historically, September is the worst month for stocks.
"What I've learned is nobody knows what's going to happen in the next couple of weeks," said Charlie Bobrinskoy, vice chairman and director of research at Ariel Investments.
Bobrinskoy appeared on CNBC's "Squawk on the Street" Friday and discussed opportunities in health care. He says the current period parallels the period in the 1990s after then First Lady Hillary Clinton's health care reform failed to take hold. Pharmaceutical stocks were depressed by talk of the prospect of change, but shot higher after they failed.
Health care reform has been a red flag for traders, who believe if Congress makes progress toward a bill, it could hurt the stock market, and certainly the health care sector. As reform looked less likely in the past week, health care shares gained 2.9 percent and were the second best performers after energy, up 3.2 percent.
Therefore, the return of Congress in September is viewed as a potential negative catalyst. "There were certainly points in time...certainly earlier in the year, you see the pattern where you get a couple of weeks of policy action and the market would get troubled by it," said Barry Knapp, head of U.S. portfolio strategy at Barclays Capital. "Then Congress would go on break, and the markets would be relieved... That could be another minor negative as we're getting into September."
Knapp said the economic data in the next week should continue to tell the same story of improvement in manufacturing and housing.
"The numbers we're looking at over the next week or so, they're still going to look good—decent housing, strong manufacturing data, weak consumption data, and there's no surprise in that for everyone. As long as that's the case, the recovery hopes stay alive," he said.
"I don't think there's any big surprises in the data until we get to payrolls," Sept. 4, he said. He said he is watching the payroll data because weekly unemployment claims are now showing they are not coming down as much as they did in past recession. "That definitely is a point of concern. The market doesn't appear too troubled by it right now," he said.
Knapp said he was encouraged this past week to see a pick up in distillate demand (diesel fuel), which implies a pickup in industrial production. "That was an interesting anecdotal data point. It's consistent with the Empire State survey and the Philly Fed survey. Obviously the manufacturing sector, in terms of employment, is fairly small. It's not clear what kind of accelerator affect that's going to have on the broad economy...That's a question we're going to have to deal with in the fall as well. When people are looking at the manufacturing recovery, and asking 'now where are the jobs?'"
He said his favorite sectors right now are technology and energy. "We've continued to stay underweight the defensive sectors," he said.
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Knapp said he is also keeping a close eye on the credit markets where some spreads have widened in the past couple of weeks. "We've had this widening and it's the beginning of the end of (the Fed's) quantitative easing, and I could see why spreads could move a little higher, and you would think that it would cause a weakening in the equities market and it's not," said Knapp.
Knapp said based on its run up, he does expect to see a pull back in the market, and like others, he sees September as a possible time for it. "I think it could be about 10 percent," he said.
Treasurys finished the week close to unchanged, despite some volatile trading. The 10-year was yielding 3.558 percent and the 2-year was at 1.081 percent. The big news for Treasurys in the coming week are the near record amount of issuance at auction.
"I believe the market will back up into the auction," said John Spinello, Treasury strategist with Jefferies. There are $109 billion in 2-year, 5-year and 7-year notes auctioned Tuesday through Thursday and another $89 billion in T-bills.
The Treasury market should stay under pressure. "I think the trend is in place for stocks, and I truly believe the trend is in place in bonds to lower prices and higher yields," said Spinello.
Spinello noted too that some spreads are widening in corporates against Treasurys but the move has been minor and he does not see it as a problem for markets.
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"I think there's so many people that invested in credit products that they're willing to take profits. It doesn't have to be economic reasons," Spinello said.
Zane Brown, fixed income strategist at Lord Abbett, said the investment grade corporates and leveraged loans are two areas where spreads have widened.
"I'm not really concerned about the widening of spreads. If we step back and look at what happened in the Treasury market, it's really surprising that the 10-year yields and Treasury market in general have held up so well, given the increasing evidence that the economy is stabilizing. You would have thought we would not have dropped from 3.85 percent to 3.50 (10-year yield). We'd actually have gone the other way," he said.
"If there is a section that's widening out marginally it would be investment grade corporates, but certainly that's nothing to concern yourself with in terms of losing money longer term," said Brown. "We would suggest there's better value in CMBS, high yield (corporates) and municipals. If you don't want to take on credit risk, if you lack faith that commercial mortgages are going to act differently than residential mortgages then investment grade municipals might be a very safe thing to get involved in."
"If the predominant theme out there is that the economy is settling down, and we're likely to have some kind of recovery, and it's likely to be prolonged, there's a great opportunity for investment returns, and if that investment is fixed income, you get paid while you wait," said Brown.
Two Big Trends in the Market Now
The dollar in the past week fell 1 percent against the euro to $1.4336 per euro . It was down 0.5 percent against the yen .
The "risk" trade, where traders buy commodities and stocks and sell the dollar, has flip flopped in the last couple of weeks. Early this week, stocks sold off on concerns that China's stock market decline meant its economy was slowing down.
Boris Schlossberg of GFT Forex said he expects the dollar to stay under pressure for now. He said there are two trends in the market right now. "Are you a deflationist or inflationist? If you are in the inflationary camp, you buy the whole risk. If you're deflationist, you buy cash, U.S. dollars and Treasury notes...and you think interest rates are going to stay stationary for pretty much the whole year," said Schlossberg.
Schlossberg said one of the themes developing has been improvement in Europe, but questions abound about China as its bank regulator tightens lending. "The fear is they'll be the one that pulls everyone back down into contraction," he said.
He said a German survey, the IFO, in the coming week could be a catalyst to push the euro higher, toward its year-high of $1.444. "Generally when the markets get very close to those key numbers, any further gains are really going to be capped. I don't see a massive second wave of the risk rally going on," he said.
Oil gushed to its year high this past week, finishing at $73.89 per barrel, up 6 .2 percent for the week. Natural gas, meanwhile, plunged 13 percent in the week to $2.80 per million BTUS, a 7-year low.
Ray Carbone of Paramount Options said the trend for oil remains higher and natural gas should stay under pressure. "I think we have a pretty healthy rise in the Dow today, and oil is chugging along as it has been since the financial crisis started. We follow the Dow and the Dow, or in the case of Wednesday, we lead the Dow. They're feeding off of each other," he said.
Carbone said unlike oil, natural gas is not tied to the dollar or global risk. It is dependent on U.S. demand, and there is a great deal of supply. Even as hurricane season is underway, he said due to wind patterns, the storms right now are more likely to head into the Atlantic than the Gulf of Mexico, where natural gas production would be threatened. That has been bearish for natural gas. Hurricane Bill for instance is traveling up along the east coast this weekend.
"We've had a relatively cool summer, and not a terrible winter last year. This is supply and demand. It has no currency risk, which is very important," he said. "It could change the complexion of the coal industry. You might have a situation where coal is more expensive than natural gas and people who might be able to go and use natural gas may do that. You could have a migration away from coal."
This week's data includes S&P/Case Shiller housing price survey Tuesday, as well as consumer confidence and the Richmond Fed survey that day. On Wednesday, durable goods and new home sales are reported. Thursday data includes weekly jobless claims, and a second look at second quarter GDP. Personal income and consumer sentiment are reported Friday.
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