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Stocks Could Rally On as Traders Watch Bernanke, Earnings

Friday, 3 Feb 2012 | 8:32 PM ET

The stock-market rally could push forward in the week ahead, absent any negative surprises from Europe.

The surprisingly strong U.S. jobs data, and the growing momentum of a 10-week stock market rally could act as a magnet for buyers, with little in the way of new economic reports in the coming week. Europe, however, remains a wild card. Greece continues to work over the weekend with creditors and is expected to be the topic of European finance ministers meeting Wednesday.

More than 65 of the S&P 500, including Coca-Cola and Disney, report in the week ahead, and there is another session of Congressional testimony Tuesday from Fed Chairman Ben Bernanke, who appears before the Senate Budget Committee.

Stocks in the past week continued a five-week surge taking the Dow to a 3.5-year, pre-recession high, and the Nasdaq to its highest level since 2000, when the 1990s tech bubble was in the process of bursting. The Dow rose 1.6 percent to 12,862 in the past week, and the S&P 500was up 1.5 percent at 1344.

“I think there’s a couple of things that could pick up volume in this market, and one of them is success,” said Art Hogan of Lazard Capital Markets. The Dow has gained 20 percent since its October low, and is up 14.5 percent in the past 10 weeks.

The Nasdaq roared ahead by 3.2 percent in the past week to 2905, the highest close December, 2000. Ironically, it was a week when some investors saw the announcement of Facebook’s much anticipated IPO as potentially heralding the start of a new tech bubble, this time in social media stocks. Nasdaq is up 19 percent since mid-December.

“There’s no fear in this market right now. They’ve absolutely crushed volatility,” said Patrick Kernan, who trades S&P 500 options at the CBOE.

The Chicago Board of Options Exchange’s VIX, a volatility measure and also a market fear gauge, fell nearly 5 percent Friday to 17.10, its lowest level since last summer. A low VIX is sometimes seen as a contrarian indicator, and typically when the VIX is at its lows, stocks are at highs.

“The VIX is a pretty good indicator of what peoples’ appetite for risk is, and the VIX certainly is implying the market has become incredibly more stable in the last two-and-a-half months,” said Kernan. “Today, people felt really comfortable coming in and selling options.”

Even as the market looks set to steam ahead, some analysts have been suggesting it is ready for a pause, given the run.

Econorama

Friday’s January jobs reportwas a major surprise to markets, causing some traders to speculate economic growth may be better than the roughly 2 percent rate expected this quarter, and that the Fed will now be less likely to ease again.

Whether the 234,000 nonfarm payrolls created in January signals sustainable job growth has yet to be seen, but it sent stocks higher, Treasury yields higher, and boosted the dollar.

“Until today, my view was the economic outlook had flattened out and was deteriorating,” said Barry Knapp, head of equities portfolio strategy at Barclays Capital. He said the question is whether growth is accelerating in early 2012. “There’s still a possibility that what we’re looking at in the labor market has been biased by seasonal factors.”

But the market could also find a period of relatively smooth sailing, barring disappointment with Europe or any negative developments surrounding Iran, which has been hit with economic sanctions aimed at ending its nuclear weapons program.

“You may have a couple months, before you get to that full (presidential) electionscycle, where there’s no external events or real big issues to be concerned about. It seems almost unfathomable to me that that would be the case, given where we were a month ago,” Knapp said.

Knapp said the post peak-primary season, after Super Tuesday in March, could prove unsettling for markets, as President Obama and the GOP candidate face off. Around the same time, Iran could become more of an issue as it heads to elections in March.

But for now, stocks could head higher and Knapp said technology shares, which have pulled Nasdaq to multi-year highs, remain his favorite sector. “If you look through it, what you see is early stage cyclical sectors like semiconductors look as though they’ve already undergone margin pressures and they’re going back up. On late stage cyclical stuff, margins are still going up and they haven’t even stabilized,” he said.

The best performers year-to-date, among the major Standard and Poor’s sectors, are materials, up 13.2 percent, financials, up about the same, and tech, up 10.4 percent.

“When you get into first quarter earnings in April, I think you’ll see a lot of pressure on margins in the industrial companies and you’ll start to see it in some of the later stage cyclical companies,” he said. Industrial are up 9.9 percent since the start of the year.

Strategists are also watching the European Central Bankwhich holds a rates meeting Thursday, followed by a presser by ECB President Mario Draghi. The Bank of England holds a rates meeting the same day and is expected to announce more asset purchases.

Brian Dolan of Forex.com said he’s watching the situation with Greece to see if it can work out a deal with creditors. “There’s any number of ways this could end badly,” he said.

Also of interest this week is trade data from China on Friday, and the Australia’s central bank is likely to raise rates Tuesday, he said.

“Foreign exchange, for the most part, is indicating risk is still on and that should provide some further momentum,” Dolan said.

What to Watch

Monday

0855 am St. Louis Fed President James Bullard on inflation targeting

1215 pm Dallas Fed President Richard Fisher on economic and monetary outlook

Earnings: Humana, CNA Financial, Sysco, Yum Brands, Coinstar, Hasbro, Anadarko, Lowes, NTT, Pioneer National

Tuesday

1000 am Fed Chairman Ben Bernanke testifies before Senate Budget committee

1000 am JOLTS (Dec)

0100 pm 3-year note auction

0200 pm Consumer credit (Dec)

Earnings: Coca-Cola, Disney, BP, Hartford Financial, Toyota, UBS, Martin Marietta Materials, Arcelor Mittal, Scotts Miracle-Gro, Becton Dickinson, Panera Bread, Perkin Elmer, Emerson Electric

Wednesday

1040 am San Francisco Fed President John Williams on the Fed and economic recovery

0100 pm 10-year note auction

Earnings: Cisco, Visa, Nissan, Time Warner, Sanofi, Moody’s, Sprint Nextel, Time Warner, Statoil, Whole Foods, Groupon, Akamai, Plains All-American, Ralph Lauren, News Corp

Thursday

0700 am Bank of England rate announcement

0745 am European Central Bank rate announcement

0830 am Weekly jobless claims

1000 am Wholesale trade

0100 pm 30-year bond auction

0430 pm Fed balance sheet

0430 pm Money supply

Earnings: Pepsico, Philip Morris, Credit Suisse, LinkedIn, Thomson Reuters, Diageo, Rio Tinto, Vodafone, Dunkin Brands, Noble Energy, Teradata. Activision Blizzard

Friday

0955 am Consumer sentiment

1250 pm Cleveland Fed President Sandra Pianalto on creating value in distressed neighborhoods

1000 am International trade (Dec)

0200 pm Federal budget (Jan)

Earnings: Alcatel-Lucent, Barclays, NYSE Euronext, Arch Coal, Calpine, PPL

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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