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Stocks Looking Past Europe for a New Driver

Stocks could continue to drift higher for now as investors look for the next catalyst to drive the market.

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The major market indices have all gained more than 20 percent since October, and much of that has been since December, when the European Central Bank provided a new liquidity program for European banks.

“If there’s a resolution of the Greek situation it will allow us to move to the next level,” said Byron Wien of Blackstone. “It’s like a saw-tooth pattern — you can make some progress moving one step forward, two steps back.”

Greek officials Thursday agreed to a series of budget cuts that could help clear the way for its next bailout package from the International Monetary Fund and euro zone nations. But markets Thursday focused as much on the Greek news as they did on weekly jobless claims, and that was not much at all.

“Stocks have already bet on the likelihood there’s been a resolution of the (European) sovereign debt crisis,” said Wien.

The Standard & Poor's 500 rose nearly 2 points Thursday to 1351, the edge of a resistance zone it must break through in order to move back toward 1370, last year’s high.

But the move higher that has also taken the Dow to a 3-1/2 year high, and the Nasdaq to an 11-year high has lacked the volatility that sent the market skidding in the summer months.

Dan Greenhaus, global market strategist at BTIG, said the S&P 500 has moved just a half a percent or less in 19 of the 26 trading days this year so far. Yet, the S&P is up 7.5 percent year to date.

Greenhaus said one reason for the market’s quiet tone is the possibility Greece could default kept some money sidelined, and those funds could return to the market once a final deal is announced.

Richard Bernstein, CEO of Richard Bernstein Capital Markets, said the market has mostly factored in a Greek deal, but not entirely and there could be some upside. Greece is also working on an agreement with private investors that will result in a restructuring of its debt.

“The more bank-friendly things are in the short term, probably the more the markets rally in the short term. But longer term, it’s a bigger problem because you are not shrinking the excess capacity in the system,” he said.

Bernstein says he is still bullish on stocks, but he has become slightly more cautious in the last couple of weeks as he sees a weakening in the corporate profits machine that has helped drive the stock markets’ more than 100 percent rebound from the March, 2009 low.

Earnings Flag

“For the first time this quarter, there’s a chink in the armor of the corporate sector,” Bernstein said. “The number of negative surprises in this earnings season is so far the highest since 2007-2008. The reason negative surprises are so important is because companies game the system to get positive surprises. Negative surprises signal the company couldn’t control something. Something went wrong.”

As of Thursday, 26 percent of the S&P 500 companies reporting so far this quarter missed earnings estimates. Another 63 percent beat, but that number is a good 10 percent below the recent average.

“I don’t think that’s a reason to give up on the market, not at all. We’re starting to see a shift from the corporate sector to the household sector, which might be healthier for the economy overall,” he said.

Market strategist Marc Pado said the market focus has already moved past Europe, which is what drove it lower between August and October, and provided some additional bumps later in the year.

He said that for now, the market could continue to go higher but investors may soon find themselves focused on Washington once more, as Congress turns to the payroll tax holiday, which expires at the end of the month.

“We somewhat decoupled our markets from what was going on in the short term (with Greece). What’s been driving our markets in January and February was not because Greece was going to get a deal done, but because we’re focusing on other things, and that was domestic growth, and job growth and that the economic news was getting better,” said Pado.

If the tax debate in Washington turns contentious, the market could suffer, he said. February is a typically weak month for stocks, but the market could move higher for now despite that.

“I would be looking between now and mid-March for a 3 to 5 percent pull back in the market. You will have willing buyers below the market. You don’t have any reason for aggressive selling but you don’t have a reason for aggressive buying,” said Pado.

March is also when Europe could come back into the headlines as European leaders revise their treaty.

Another factor that has been working in favor of stocks is Federal Reserve officials continue to hold the door open for another potential round of quantitative easing . It would be the third such program, and would focus on mortgage purchases by the Fed.

QE, in theory, drives down interest rates and sends investors into riskier assets, like stocks. But some traders see the improving data, including jobs data, as one positive that may deter the Fed from further easing.

Bernstein tracks jobless claims closely, and sees it as one of the most important indicators. “I think it’s very hard to argue the labor market is not improving,” he said.

Initial claimsThursday were reported at 358,000 and the four week average was 366,250, the lowest level since April, 2008.

“In the 45 years of weekly data, the average is 363,000. So we’re below average,” he said.

Analysts are also keeping a close eye on China, which reported hotter-than-expected inflation data Thursday. CPI was up 4.5 percent in January, while analysts expected 4.1 percent.

Bernstein said it’s a worrying sign.

“What they did was they tightened. Inflation went down. They eased, and inflation came back faster than anybody expected. My argument has been that China was the biggest beneficiary of the global credit bubble, and they’re going to find this is hard to stop,” said Bernstein.

What to Watch Friday

China’s trade data is released overnight.

Friday’s U.S. economic reports include international trade data at 8:30 a.m. ET

EST and consumer sentiment at 9:55 a.m. ET

Earnings are expected from Barclays , NYSE Euronext , Calpineand Arch Coal .

Italian Prime Minister Mario Monti will speak with CNBC’s Maria Bartiromo at 4 p.m. ET

Home builders gather in Orlando for the annual National Association of Home Builders conference.

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

  • Patti Domm

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

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.