Markets may show if stocks ready to break out or just fake out

Now that the S&P 500 has reached new ground above 2,120, the next test is whether it can continue to run or whether it falls back into the range it has held for the past several months.

Traders on Friday will focus on May consumer sentiment and April's industrial production, after a week of disappointing data pared economic growth forecasts for both the first and second quarter.

But even as economic news was fairly negative, stocks staged a massive rally Thursday, taking the S&P 500 to a closing high. The index rose 1 percent to 2,121, a record finish and just 4 points from the all-time intraday high. Helping stocks were the sagging dollar and a pullback in interest rates as well as short covering.

Stock futures were slightly higher Friday as bonds stabilized. European stock markets were higher, as sovereign bond yields retreated slightly.

"Everybody was calling for a big correction, which happened over time, versus price. ... The S&P broke over 2,120. It hasn't been able to do that over the course of the past few months. The range has been building for four months, at the same time all of the frustration has been building," said Scott Redler, partner at "Lately the small caps, big caps and bios have been a headwind, but they all seemed to turn back up and that supported the move."

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But others are less optimistic the S&P will be able to continue its trek higher just now.

"We're back up to the top of the trading range. What the catalyst taking us out of this trading range is, I don't see it," said Steve Massocca, managing director at Wedbush Securities. "Odds are we're going to stay between—call it 2,050 and 2,125—for a while."

"I think we turn around and go back down. We'll probably get a little head fake, like we did last time," he said.

Redler said skepticism in the market may be what fuels further gains, as money managers are forced to chase performance. "A flat open or inside day tomorrow wouldn't be so bad. But to give back more than half of today's gains tomorrow would be frustrating," he said.

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Massocca said one thing holding back the market is the already rich valuation for stocks at a time when economic data are not that good, but he notes there is plenty of cash around to force a move. "There's a lot of dry tinder out there. A spark could get it going. There's still a lot of accommodative policy out there. ... It's still the (high) stock price that's holding it back," he said.

Thursday's data were mixed with a stunningly big 0.4 percent dip in producer prices, but the four-week average for jobless claims is now running at a 15-year low.

Meanwhile, in the bond market, each negative piece of data pushes on the expectations for a Fed rate hike. John Briggs, head of strategy at RBS, said by the firm's calculations, the markets now see the odds of a first central bank rate hike in September at just 36 percent, and the odds for December are now 87 percent. The biggest odds are now for a January hike.

Bond yields edged lower Thursday, with the 10-year at 2.23 percent in late trading, and the 30-year at 3.05 percent. "I think we're almost done with the near-term correction," he said.

Briggs said despite the current betting in futures markets, the Fed could still move in September if the data improve.

"In general, we recommend selling rallies (in Treasurys). ... There could be selling pressure once you head into the May data, reported in June. The pressure is going to move to the front end of the curve," he said.

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Briggs said the bond market will be most focused on May's consumer sentiment at 10 a.m. ET since Wednesday's retail sales threw into doubt a rebound in consumer behavior this quarter. Industrial production for April is set to be reported at 9:15 a.m. and the Empire State survey released at 8:30 a.m.

After Wednesday's weak retail sales, JPMorgan cut second-quarter GDP growth to 2 percent from 2.5 percent, a number that not long ago was 3 percent or better at most Wall Street houses. "The failure of consumer spending to get out of the gates with any vigor in April implies only a moderate pace of consumption growth in Q2. Consumers are the biggest question mark right now, as most other components of GDP are behaving as one might expect," JPMorgan economists wrote.

On Thursday, the JPMorgan economists, and others on the Street were again slashing already negative first-quarter GDP to an even more negative number after revisions to factory orders. Barclays chopped 0.3 percent off its number and now sees first-quarter growth tracking at negative 1.1 percent.

The 2015 revisions included a cut in core capital goods shipments in February to negative 2.3 percent, compared to a positive 0.2 percent. That boosted the change for March to up 0.9 percent, but the overall contribution from core capital goods shipments is now lower than expected, the Barclays economists said. First-quarter GDP revisions will be released later this month.

The negative data are also weighing on the dollar, and that's helping stocks.

Gold also benefited from a lower greenback, settling at $1,225.20 an ounce, the highest level since mid-February.

Howard Wen, precious metals analyst at HSBC, said the rally has legs short term and gold could reach $1,230/35 an ounce. He said the gold futures crossed the 200-day moving average of $1,221.66 an ounce Thursday.

"The recent rally hasn't been in conjunction with physical demand," he said. "We're kind of slow on that front. That leaves us to believe that this is more a rally in the paper market—a macro-related rally. In order for this rally to be sustained, you need physical buyers in the market but now we're approaching the summer months—a weak period for physical demand," he said.

The World Gold Council on Thursday reported that gold demand fell 1 percent in the first quarter.