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Tuesday Look Ahead: Stocks Head Towards Psychological Milestones

The Fed kicks off its first meeting of 2011 Tuesday, as key stock indices edge toward psychologically important milestones.

The Dow onday jumped 108 points to 11,980, just shy of 12,000, a key level it hasn't seen since June, 2008. The S&P 500 up 7 at 1290, is at the same time edging close to the 1300 level. Winning sectors were tech, up 1.6 percent, followed by materials, up 1 percent. The only losing sectors were financials and health care, both fractionally lower.

There's little chance the Fed will change its tune during the two-day meeting, which should keep the 22-month long party for stocks going.

"My target is 1350 for the year .We're getting close already," said Jack Ablin, CIO at Harris Private Bank. "It's good. Having the stock market up is a good thing. I'm not going to take anything away from that."

The Dow is up about 3.5 percent so far this year, and the S&P and Nasdaq are up 2.6 and 2.4 percent, respectively. But the smaller stock index, Russell 2000 is trailing, and is about 0.6 percent lower since the start of the year.

"Maybe it's just a maturing recovery," said Ablin. "As the recovery ages, generally you get a rotation into large cap and growth and that's where we're positioning to. One sector that's waiting in the wings is health care, which is as cheap as I've ever seen it."

Pimco senior strategist Tony Crescenzi said the Fed may tweak its language on the economy when it issues its release Wednesday, but it will not alter its intention to proceed with its $600 billion Treasury purchase program. "The general view on the street is there will be some upgrade in the Fed's assessment of the economy, but the crucial line about the rapidity of the growth is likely to be held in tact..it may be watered down because we are about to see, we believe, a better GDP number for the fourth quarter," he said. But the growth is not strong enough to make a big difference in the unemployment level, a major concern for the Fed.

Fourth quarter GDP is reported Friday and economists expect about a 3.5 percent rate of growth. "The best pace of personal consumption since the fourth quarter, 2006 - roughly a 4 percent pace - and the composition of Friday's GDP report will likely be such that people will say the economic is moving closer to achieving escape velocity, or self-reinforcing growth," he said.

The Fed is also not likely to change its tone on inflation, though Fed Chairman Ben Bernanke in recent remarks, said that deflation has become less of a threat than it was. The specter of inflation, however, has roiled global financial markets, especially in the emerging world. Talk of inflation in Europe has also helped drive the euro higher against the dollar, which was down 0.2 percent Monday. The euro finished the day at 1.3645.

Besides the Fed's meeting, there are a few economic reports of note Tuesday. The S&P/Case-Shiller Home Price Index for November is released at 9 a.m., and the FHFA home price index is reported at 10 a.m. Consumer confidence is due at 10 a.m. There is also the auction of $35 billion in 2-year notes at 1 p.m.

President Obama gives his State of the Union address Tuesday evening and he is expected to strike a centrist tone and highlight job creation and American competitiveness.

There is another barrage of important earnings news, including reports from DuPont, Johnson and Johnson, 3M, Verizon, Travelers, Siemens, Coach, Corning, Baker Hughes, Kimberly-Clark and Peabody Energy. After-the-bell reports include Yahoo, Norfolk Southern, Juniper Networks, Stryker and Gilead Sciences.

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Questions? Comments? Email us at marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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