Stocks should trend higher in the coming week and are in easy striking distance of a new high for the year.
The quadruple options expiration on Friday could add a flurry of volatility, but investors should take encouragement from a recent batch of better economic data that has some economists ratcheting up forecasts for fourth quarter growth. JPMorgan, for one, raised expectations for fourth quarter GDP growth to 4.5 percent from 3.5 percent after upside surprises in inventories, net exports and retail sales.
In the coming week, the Fed holds its final meeting of the year, and inflation data, industrial production, jobless claims and housing reports will dominate the economic news. Traders say stocks could meet little resistance in their upward climb, barring no new nasty surprises, like the Dubai World debt restructuring. They also expect the coming week will see even fewer players participating in the markets ahead of year end.
"We still think we can grind higher into the New Year," said Joseph Quinlan, chief market strategist at U.S. Trust. His target for the S&P 500 is 1150 and his target for 2010 is 1300.
The Dow in the past week finished 0.8 percent higher at 10,471 and the S&P 500 was up 0.4 percent at 1106. Nasdaq was lower, however, off 0.2 percent at 2190. The dollar rose on the week, with the dollar index finishing 0.8 percent higher at 76.53. The S&P 500 is just 4 points from its year closing high of 1110, set on Nov. 25. The Dow is within a fraction of a point from its 2009 high, set on Dec. 1.
The euro lost 0.7 percent against the dollar in the past week and weakened to $1.4623 per euro. At the same time, many commodities fell. Oil was 7.4 percent lower at $69.87 per barrel, and gold dipped 4.2 percent to $1,119.90 per troy ounce.
A wild card for the markets is the U.S. dollar, which in recent sessions has been breaking out of the seesaw pattern it's been trading in with stocks since the bull run began. Whether the dollar is decoupling from the "risk trade" has been the topic of much debate in the past week. In that closely linked trade, the dollar moves lower while risk assets, like stocks and commodities, move higher on the idea of a global economic recovery.
Now, stocks and commodities appear to have parted ways. The dollar also has broken that pattern and traded higher on strong U.S. data, first after the stronger-than-expected November jobs report on Dec. 4. The greenback rose again Friday, as the Dow and S&P moved higher on better-than-expected retail sales, inventories and consumer sentiment.
"I'm medium-term bullish the dollar," said Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman. He said there was an important technical move by euro against the dollar Friday.
"There has been some serious technical deterioration," he said. The euro broke below the 100-day moving average of $1.4639, and if it gets through the next level of $1.4580, it could move down to $1.4480. "Technically, that's a poor sign for the euro."
Chandler said the dollar's strengthening though is premature and it will reverse course. "I think the reason people are not going to fully trust this is you do have lighter markets in the holiday season and many people thought there could be long liquidation of foreign currencies as investors took profits and moved to the sidelines," he said.
Chandler said what would finally push the dollar higher in a more sustained way would be better U.S. data and a Fed that is raising interest rates from the current zero level. "It's old-fashioned cyclical reasons. As soon as we get convincing strong economic data and the Fed starts tightening, the dollar will gain traction," he said.
Does Fed See Consumers Are Back?
The Fed meets for two days in the coming week and is set to release its statement Wednesday. It is not expected to make any change to its language about keeping rates on hold for an "extended period."
"I think they'll recognize the consumer's coming back. I think they might make another token comment about commodities prices but at the same time, they'll stick with the view that inflation is going to stay low," said Chandler.
Quinlan said he thinks the dollar is basically range bound, and that some of the fiscal issues in euro zone countries like Greece and Spain are adding to euro weakness.
"I don't think the dollar is going to have a moon shot here. There's just too much of a federal deficit overhang, and too much uncertainty about some of these programs," like health care reform, he said.
Retail spending could be another surprise this holiday season. November's retail sales rose 1.3 percent, well above the expected 0.7 percent. CNBC's Wealth in America survey showed that consumers in aggregate plan to spend 10.5 percent more this year than last, though there is a big divide between wealthy consumers, who plan to spend much more, and lower and middle class consumers, who are still pulling back.
"I think there is so much pessimism coming into this season I think it's going to be better than expected from a low base. People are starting to feel better about their future. Over the last 12 months people have found their footing. They'll be spending a little bit more. It's not going to be gangbusters," said Quinlan. He said retail sales alone won't propel stocks, but it should help if retailers do better than forecast. "These are all building blocks for the market to go higher," he said.
Quinlan said the market has some major challenges next year and the move to 1300 on the S&P will not be without bumps. He said it's important that jobs data continues to show improvement, but he also said investors will be watching the monthly U.S. budget deficit figures and will want to see them shrinking, not growing.
But on the positive side, earnings should show improvement in 2010 from a blend of cost cutting, top line growth, and improving foreign sales, due to the weakened dollar.
"It's not going to be all at once, but there's going to slowly but surely be a rebuild of confidence in terms of owning equities...We were still scared from 2008. We were still unbelievers in 2009," he sid. But in 2010, he said investors will be more comfortable about putting money into the market.
What Else to Watch
On Monday, chief executives of the biggest banks head to the White House to meet with President Obama, and investors will continue to watch for developments as Citigroup and Wells Fargo work on capital raising plans to pay back the government's TARP program.
On Tuesday, PPI, the Empire State survey, industrial production and the National Association of Home builders survey are released. The Treasury's TIC data on capital flows is also reported that day. On Wednesday, CPI, housing starts and the current account are reported. Thursday's data includes weekly jobless claims, leading indicators and the Philadelphia Fed survey.
Fed Chairman Ben Bernanke's nomination is voted on by the Senate Banking Committee on Thursday.
There are a few high profile earnings, including Best Buy Tuesday and FedEx, Research in Motion, Nike, General Mills and Oracle Thursday.
Nike earnings should get extra attention as investors consider the impact of the Tiger Woods scandal and the news he will take a hiatus from golf.
Investors are also monitoring developments at the U.N.'s climate change conference in Copenhagen, which will be attended by President Obama at the end of the week.
— Questions? Comments? marketinsider@cnbc.