Wednesday's economic data could help investors decide whether Tuesday's stock rally is the start of a turn around or just a break in the clouds.
A number of analysts suspect the latter, even if the bounce were to continue.
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Stocks rose globally Tuesday after Chinese industrial production data came in better than expected. U.S. stocks got another boost when May's retail sales were not as gloomy as expected, with a 0.2 percent decline beating the 0.6 percent drop that was expected.
The Dow was up 123, or 1 percent at 12,076, and the S&P 500 jumped 1.3 percent to 1287. The Nasdaq was up 1.5 percent at 2678. Energy was the top performer, up nearly 2 percent, followed by materials, up 1.9, and industrials 1.8 percent.
Wednesday's markets should see some positive effect from another hot IPO, on-line radio service Pandora, which priced $4 above the top of its range at $16 Tuesday. The morning's economic reports include CPI consumer inflation data, at 8:30 a.m. ET; the Empire State survey for June at 8:30 a.m.; May's industrial production, at 9:15 a.m. and the June NAHB survey, at 10 a.m. Treasury international capital flow data is released at 9 a.m.
Whither Stocks
"We've been pretty cautious over the last month or so. We've had a couple of big up days, and we've been giving it all back. I'm not ready to call the end of the correction," said Ed Keon, portfolio manager with Prudential's Quantitative Management Associates.
Keon said for the first time since stocks hit bottom in March, 2009, he has turned neutral on stocks though he is still basically a bull. "We have over the past month or so been net sellers and gone from big overweight of stocks to more or less natural. I think we are fundamentally in a bull market, and corrections in a bull market are not unusual," he said.
Analysts had been expecting a choppy ride into summer, and the market has not disappointed. The S&P 500 is now down about 6 percent since late April. Analysts and traders point to a long list of worries, including overly high expectations for corporate earnings; the debt debate in Washington; the end of the Fed's quantitative easing program, and the ongoing sovereign debt crisis in Europe.
"I think it could still be a little slippery to peg a bottom here, but I do think we're going to be higher by year end," said Lori Calvasina, small and mid cap equity analyst at Credit Suisse. The Russell 2000 small cap index was the best performer of the major indexes, up 2.2 percent Tuesday.
Scott Redler of T3Live.Com said it feels like the market rally Tuesday was part of an oversold bounce and the selling isn't over. He said the quadruple witching expiration of futures and options Friday could be a factor in the volatility. "It's going to be in the next week where the true colors come out and show whether there's any commitment to the bounce," he said.
Keon sees two big immediate issues for the market. One is earnings, and he pointed to the high expectations for profits in the second half and next year.
"The consensus is double-digit growth second half of the year and next year. To get there, given pretty weak sales growth, you need to have profit margins continue to expand from already high levels. I find that hard to believe," he said.
Keon said the other obstacle is the slowdown in economic activity. "Is it a pause or something more serious? In my opinion, and I think it's the consensus at this point, is that it's just a pause," he said. "We don't know that for sure yet, and we need some clarity on the downturns we've seen in the ISM data and employment data and a lot of macro data. We'd like to see some improvement here for the next couple of months before we start adding to our stock positions."
Stocks in Bondage?
Before the stock market sell off accelerated last month, the bond market was flashing signs that all was not well, and yields began to slide as buyers moved in. Some traders are looking at Tuesday's move in the 10-year as a possible sign the market has been overly aggressive in pricing in the economic slowdown. The 10-year yield Tuesday ranged between 2.978 and 3.105 percent as sellers stepped in. It was at 3.097 late in the day.
"This move through the bullish trend line at around 3.01 confirmed our bearish view that the next near term move in yields is 3.25 and potentially 3.40. Our view has been with the market price where it is, in order to sustain sub 3 percent 10-year yields, you have to have an ongoing steady drip of negative news. Our work shows momentum for the (bond) rally was flagging," said John Briggs, senior Treasury strategist at RBS.
Greece dominated the European headlines Tuesday as EU finance ministers failed to resolve disagreements over how to structure another bailout. Talks are set to continue, as the date of the June 23/24 EU leaders meeting looms. Greece on Wednesday expects strikes at ports, banks, hospitals and state run companies as its two biggest labor unions protest austerity measures and asset sales.
"We're becoming a little more insulated to Greece. The overnight price action had a decent response in equities from the Chinese data and the lack of disappointment in retail sales seemed to help risk assets across the board," said Briggs.
"I think in general we're going to see an increase in volatility in all asset markets heading into the end of QE2. We're going to have the end of QE 2 colliding with the end of the quarter with ever-shrinking dealer balance sheets," he said. QE2, the street's name for the Fed's Treasury market purchase program or quantitative easing, is set to end June 30.
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