As stocks climb to multi-year highs, investors are increasingly expecting a pull back, despite the promise of a good earnings season.
Major banks Citigroupand Bank of America; tech companies, like Apple, IBM and Google and industrial giant General Electricjoin dozens of companies reporting earnings in the week ahead. General Electric is the parent company of CNBC.
There is also a smattering of data, including home sales for December and weekly jobless claims.
President Obama meets with Chinese President Hu Jintao in a closely-watched Washington summit on Wednesday. European finance ministers meet Monday and Tuesday and are expected to discuss expanding their bailout fund and other measures to stem the sovereign debt crisis.
The S&P 500 gained 1.7 percent in the past week to 1293, its best close since August, 2008. The Dow was up 112 points, or nearly a percent to 11,787, its best week since early December and its best close since June, 2008. Nasdaq rose 52 points, or 1.9 percent to 2755, its highest close since November, 2007. The S&P MidCap 400 set an all time high Friday, at 931.
Traders expect the S&P 500 to test the psychologically important 1300 level in the shortened holiday week, which includes options expirations on Friday. U.S. markets are closed Monday for the Martin Luther King holiday.
"I think we definitely go to 1300...It feels like it's got to go there before it does anything else," said Cardinal Capital's Patrick Kernan, who trades S&P options at the CBOE.
"I would think the market's propped up between now and next Friday," he said. "The market's pretty complacent here and probably going a little bit higher. After next Friday's expiration, then you might see people repositioning a little bit."
"We have pushed it in terms of time and distance without some sort of a pull back. You hate to say we're due, but we're probably due. It seems like what is not going to trip us up are earnings. It's something else."
In the past week, Europe's debt concerns hung over the market but sentiment improved when it seemed officials would take action to expand the bailout fund and the European Central Bank purchased sovereign debt.
Auctions in Portugal, Spain and Italy were also seen as successful. The euro did a quick about face and got a major lift from comments from European Central Bank President Jean Claude Trichet, who warned of signs of inflation in the euro zone. The euro gained 3.5 percent to 1.3375 against the dollar, its best weekly gain since May, 2009.
"Europe didn't trip us up. The (stock) market moved right past that," said PNC Wealth Management chief investment strategist Bill Stone. But Stone said the market is due for a pause.
"We have pushed it in terms of time and distance without some sort of a pull back. You hate to say we're due, but we're probably due. It seems like what is not going to trip us up are earnings. It's something else," he said. Stone expects earnings to beat analysts' quarterly consensus on S&P 500 earnings by about five percent.
One concern dogging the market is that China will overreach in efforts to slow its growth and snuff the global recovery. On Friday, China moved to tighten bank reserves to cool inflation, sending many commodities lower. Gold fell nearly 2 percent Friday, and was down just over a half percent for the week at $1360.40 per troy ounce.
Other commodities were also volatile. Oil rose nearly 4 percent, with crude ending the week at $91.54. Agricultural commodities also were big gainers, after a USDA crop report showed less supply than expected. Corn jumped 9 percent on the week, and soy beans were up 4.2 percent.
Jordan Kotick, global head of technical strategy at Barclays Capital, said the volatility across markets is not unusual early in the year. "In the month of January, almost every asset class has a tendency to test both sides of the market," he said.
"Usually in the middle of the first quarter is when volume comes back" and "smart money" allocates capital, he said. He said he still likes stocks though emerging markets equities are a bit overdone, and he expects more money to roll into energy.
"We like everything in energy except for natural gas," he said. Energy stocks were the best performing of the major S&P sectors for the past week, gaining 3.3 percent.
China Rising
Trade, North Korea, climate change and, of course, the Chinese currency are all topics expected to be discussed during the Washington summit Wednesday.
As U.S. officials continue to criticize China for constraining appreciation of its currency, the yuan is trading at its recent high and is up about 1 percent since the start of the year, according to Brian Dolan of Forex.com.
"Usually, they let the yuan appreciate a little bit ahead of their meetings, and it would be normal that usually after, they'll keep it subdued. There's still in a situation where they're trying to restrain inflation, and that is a good argument for them to allow their currency to strengthen further," Dolan said. U.S. officials complain that China gets an unfair trade advantage by keeping its currency cheap.
While not so much a market event, Dolan expects investors to keep a close eye on the summit. "In terms of symbolism and the presence of China on the world stage, in that regard, this is going to be a high diplomatic drama," he said.
In terms of the currency market, the action could remain in the euro. European finance ministers are not expected to take action on the bailout fund at their meetings this week.
"It'll be important for them to show some further momentum in terms of coming up with a longer term solution. Germany is still opposed to any common euro bonds so that makes the only solution they're likely to come up with is an enlargement of the stability fund. That is going to have to be quite sizeable. That sets up the possibility for Germany to foot the largest part of that bill, and that is politically unpalatable in Germany," he said.
Dolan said it's possible for the euro to drive higher toward $1.36, but ultimately the dollar will regain some strength against the currency. "The dollar is going sideways, but I think we're going through a little bit of a pause right now. I think the trend is overall for a stronger dollar," he said.
Econorama
There are just a few items on the economic calendar in the week ahead. The highlights include housing data. The National Association of Home Builders survey is reported Tuesday, housing starts are Wednesday and existing home sales for December are Thursday.
Weekly jobless claims will also be carefully watched after a surprising jump in the past week. Bank of Tokyo-Mitsubishi chief financial economist Chris Rupkey said it is possible that seasonality is a factor in the numbers, and he expects about 425,000 claims this week.
Rupkey said weather may be a factor in the January employment picture and the weather could potentially impact the January jobs data. He also expects to see retail sales slacken a bit in January. December sales, reported Friday, rose 0.6 percent, slightly below expectations.
"We go through these periods where consumers buy for five or six months and then they pause a little bit. We're right about the place where we pause," he said.
"I have a feeling that the gasoline price hike of 40 cents, back above $3, could slow spending," he said.
The Empire State survey is released Tuesday and the Philadelphia Fed survey is issued Thursday. The Treasury releases data on international capital flows Tuesday.
Earnings Central
The coming week will be a busy one for corporate earnings reports. Citigroup reports Tuesday morning, as does Forest Labs and Ameritrade. Apple and IBM report after Tuesday's market close. Goldman Sachs, Wells Fargo, Bank of New York Mellon, State Street, US Bancorp, Northern Trust and Comerica report Wednesday morning. eBay, Sallie May, Seagate, F5 and Xilinx report after Wednesday's closing bell.
Thursday's reports include Morgan Stanley, Freeport McMoran, Huntington Bancshares, PNC, United Health, PPG industries, Rockwell and Union Pacific. After the bell reports are expected from Google, Capital One and Advanced Micro. Bank of America, Schlumberger and General Electric, the parent of CNBC, report Friday morning.
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