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Market Outlook: Everyone Is Waiting for a Stock Pullback

Markets head into the week ahead on a tentative note, even as Greece looks set to get its bailout funds.

Rose | Mueller | Stock4B | Getty Images

Analysts have been saying for much of February that the market is ripe for a pullback, but the indices continue to rise, taking the S&P 500 close to its 2011 high and the Dow and Nasdaq to multi-year highs.

The S&P 500, in the past week, rose 18, or 1.4 percent to 1361, and it is now up 24 percent from its October low and nine points below its 2011 high. The Dow, up 1.2 percent for the week to 12,949 is in reach of 13,000, a key psychological level. It is also at the highest level since May, 2008.

“The market continues to work its way higher. We are knocking on the door of the April 29 recovery high. It feels like there are an awful lot of people calling for a correction—or at least a digestion—and I’m one of them,” said Sam Stovall, chief equity strategist at S&P Capital IQ.

Stovall said with history as a guide, when stocks rally, off a ‘baby bear’ correction, like the one that ended in October, they on average rebound by about 23 percent within six months. The current market rally is ahead of schedule, and stocks have made similar gains in just 4-1/2 months.

“We think we’re going to get to where we are now, or even as high as 1380 (on the S&P) and then maybe go down to the low 1300s before approaching 1400. That’s the scenario our technicians are talking about,” he said. He said he would then look for a steeper correction in the second or third quarter.

Even if things go well for Greece at the European finance ministers meeting Monday, stocks could still give up some gains in the near future, analysts say.

U.S. markets are closed Monday for the President’s Day holiday. The ministers are deciding on a 130 billion euro bailout plan that would stave off default for Greece.

“I honestly don’t have much faith in the deal though I think the ECB (European Central Bank) swap plan is technically to get them out from under and being swallowed up when a deal comes between Greece and its private creditors,” said Art Cashin, director of floor operations at UBS.

The ECB is reported to be planning to swap its Greek bonds for new bonds, in a move traders say will help it avoid the steep losses private investors are expected to take.

As Greece has edged closer to a deal, stock prices have increasingly appeared to be getting toppy.

“It’s tough not to be bearish. They do look overbought. There’s a lot of people saying the number of new highs have declined as the rally moved on. That’s a divergence and usually negative,” Cashin said. “I’m cautious in here.”

Many expect a shallow sell off but that has yet to be seen. “I won’t know until it starts,” said Cashin.

Citigroup’s chief U.S. equities strategist Tobias Levkovich, in a note Friday, points out the market appears to be at a near term top.

“Metrics suggesting complacency and increasing margin pressures all argue that share prices may need to consolidate. Anecdotally, investors also seem more willing to buy now, fearing being left further behind the index benchmark,” he wrote.

Levkovich added, however, that his constructive view on the market is not changed, and his year-end target remains 1,425 on the S&P.

There is little U.S. data in the coming week. In the past week, jobless claims and a few other economic reports provided a few positive surprises, giving support to the market’s gains. There are weekly jobless claims, as well as housing data in the coming week. There are also three auctions for a total $99 billion in Treasury notes scheduled.

Earnings season is winding down, but retailers are among the final companies to report this quarter, with Walmart and Home Depot reporting, among others.

“What’s particularly interesting about the earnings from retailers is they’ll tell you something about the different income brackets. You’ll have Saks on one hand, which will tell you about the upper income bracket and on the other hand, you have Walmart and Dollar Tree,” said Daniel Greenhaus, chief global strategist at BTIG.

Analysts have said an increasing concern for the consumer is the rise in gasoline prices, which are up 15 cents in the last month and are 40 cents higher than at the same time last year. Gasoline prices helped push the CPI higher, when it was reported up 0.2 percent Friday. Gasoline was up 0.9 percent for January.

What to Watch

Monday

President’s Day holiday

European Finance Ministers Meet on Greece

Tuesday

0100 pm $35 billion 2-year note auction

Earnings: Home Depot, Kraft Foods, Walmart, Macy’s, RadioShack, Saks, Steve Madden, Cabot Oil, Chesapeake energy, Dell

Wednesday

1000 am Existing home sales

0100 pm $35 billion 5-year note auction

Earnings: Hewlett-Packard, TJX, MGM Resorts, Limited Brands,Toll Brothers, Dollar Tree, William Cos, Express Scripts, Eaton Vance, Fluor, Hertz Global

Thursday

0830 am Weekly jobless claims

1000 am FHFA home price data

1100 am Kansas City Fed survey

0100 pm $29 billion 7-year auction

Earnings: Kohl’s, Target, Liberty Media, Safeway, Dish Network, Echostar, Foster Wheeler, AIG, Gap, Live Nation, Salesforce.com, TiVo, Healthsouth, Hormel, Echostar

Friday

0955 am Consumer sentiment

1000 am New home sales 1045 am St. Louis Fed President James Bullard and San Francisco Fed President John Williams on housing and monetary policy at the University of Chicago Booth School

0130 pm Philadelphia Fed Presdient Charles Plosser and New York Fed President William Dudley on fiscal challenges at the University of Chicago Booth School of Business Initiative on Global Markets

Earnings: JCPenney, Newmont Mining, Washington Post, Pinnacle West, Telefonica

Follow Patti Domm on Twitter: @pattidomm

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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