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September Could be Make Or Break Time

Stocks held the high ground at the start of this week but could face a big technical challenge in the next couple of days.

Traders are eyeing the 1050 to 1060 level on the S&P 500 and believe if the market can move above that level and hang on, it will have more room to run. If not, the much anticipated pull back could begin.

On the one-year anniversary of Lehman's demise, the stock market surprised traders once more with the resilience of its six-month-old rally. After a lower start, stocks reversed course and finished Monday with slight gains even though reports of a trade spat between the U.S. and China clearly rattled investors. The Dow finished 21 points higher Monday, at 9626, and the S&P was up 6 at 1049.

"I think the fact that everyone thinks we're going down is why we're not going down for a while," said Tim Smalls of Execution LLC."The biggest ally for the market is time. Time between debacles. We've had a year since the beginning of the end," said Smalls.

The stock market is now 16 percent lower than it was when Lehman went under. Financials were among Monday's best performers, up 1.5 percent on the day but still 30 percent below year ago levels.

Whither Stocks

Brian Rauscher, former Brown Brothers Harriman strategist, said he believes it's time to be cautious on stocks. A former bear turned temporary bull, Rauscher said he's not ready to return to bear country, but he says the market is clearly at a turning point.

The New York Stock Exchange, downtown Manhattan.
Oliver Quillia for CNBC.com
The New York Stock Exchange, downtown Manhattan.

"It is getting close to the moment of truth," Rauscher wrote in an email. "If the SP500 carries through 1053-1058 the door would be open for a challenge of 1120-1160. That range encompasses both a 50% retrace of the 2007-2009 bear market and the point at which the rally from the July low equals the March-June rally."

Rauscher, in an interview, said he sees only a 25 percent chance the market will cross that threshold and break out to the upside. Raushcer turned bullish early in March and said at the time that he expected a six-month rally at most.

However, he is skeptical that the data will continue to surprise to the upside, and it may even start to miss expectations. "It's very possible that we could be stalled or roll over..I don't expect fire works to start but we could start to get some selling off and a pull back," he said.

Rauscher said he believes bullishness is now priced into the market. He doesn't think investors should expect investment returns are returning to normal for stocks. "I'm just skeptical that everything's all finished, and let's have investors go back to thinking we're going to get back to 15 percent returns," he said.

What to Watch

Tuesday's economic data (8:30am ET):

  • Producer Prices
  • Retail Sales
  • Empire State Manufacturing survey Business inventories (out at 10am ET)

The one to watch is August retail sales, which economists expect to be up 1.9 percent, driven mostly by auto sales related to the "cash for clunkers" program. Earnings reports from Best Buy and Kroger, due before the bell, will also give a good look at consumer behavior.

Deutsche Bank chief U.S. economist Joseph LaVorgna believes retail sales could be one data point that surprises to the upside. His forecast for a 3.8 percent rise is well above consensus. Without autos, his forecast would be for a 0.3 percent increase.

LaVorgna said he thinks the economy is improving more quickly than some believe, in a recovery led by inventory rebuilding and capital spending. "I think the economy is going to be hyper sensitive to any top down growth because companies are so lean and mean," he said.

Investors will also be watching Fed Chairman Ben Bernanke Tuesday when he speaks at 10 a.m. at the Brookings Institute on the year in turmoil. Bernanke will answer questions after the speech. "

I don't think we're going to hear anything different from the chairman than what we heard at Jackson Hole, which is a collective sigh of relief that things are getting better," LaVorgna said.

Credit Uncrunch

What better time for a check up on the credit markets than a year after Lehman and on the eve of another year anniversary, the bailout of AIG. Morgan Stanley's Greg Peters said there are still lingering issues, but for the most part things are improving.

"What's so unique about this cycle is everything is happening at warp speed," said Peters, global head of fixed income research.

"The down trade. The up trade. It's quite surprising. As surprising as it was it was on the downside, it's equally surprising on the repair side. In March, people thought the world was going to end.

"I don't think anyone's talking about that now.”

The Obama Administration last week moved to slap sanctions on Chinese tires. China then over the weekend said it would review complaints about U.S. exporters of chicken and auto parts. President Obama told CNBC's John Harwood, after Monday's market close, that he doesn't expect a trade war with China.

  • Obama Assures: US, China Can Avoid Trade War
  • Watch Obama On Financial Regulation

Peters said he expects to see spreads continue to tighten and the credit market in general "feels pretty good."

Traders have been talking about the bubbling Treasury market, which moved higher in the past week even with huge issuance. "That's perplexing...as you see risk markets rallying, gold rally, commodities in general rallying, you have the bond market rallying. There's not a great answer why this was happening," Peters said. " ...I think people were setting up for a weak auction last week. They did pretty well and it kind of feeds on itself. I think most people in the market think this is temporary."

  • 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.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.