Technically, the stock market looks set to break out to new highs, but there are still nagging doubts around the Fed rate hikes, the U.S. elections and other factors that some analysts say could create a summer of uncertainty and volatility.
"The sleepy market from last week now has everyone pretty much on the edge of their seats," said Scott Redler, partner with T3Live.com, who watches the market's short-term technicals. "Do [traders] really have to get involved, or is it another head fake? I would say it feels a bit more constructive than the last time we were here."
Stocks rallied hard for a second day Wednesday with the rising 14 points to 2,090, a key resistance level. The Dow gained 145 to 17,851, and the Nasdaq was up 33 to 4,894. Treasury yields were flattish, with the at 0.91 percent. The dollar index fluctuated and was modestly lower.
"We're trying to rally back and break out to new highs, 2,134 being the [S&P 500] high from May of last year. We think we can get there. We're advising clients to play for the breakout to new highs," said Ari Wald, technical analyst at Oppenheimer.
Wald said the breadth and leadership of the market has improved with cyclicals doing better. Energy was the best performing sector Wednesday, up 1.5 percent as oil futures rose to just beneath the key $50 psychological milestone. Financials were up 1 percent, moving higher in anticipation of rising interest rates.
"Is this the turn? It could be. … Pre-breakout trading can be choppy. We're open to range-bound trading in the next few weeks," Wald said. "Two-thousand-one-hundred-eleven was the April peak. To me, that's obviously the most important level. That's kind of where the rally stalled off of the February low. We've corrected since then."
For Thursday, traders will be watching jobless claims and durable goods at 8:30 a.m. EDT, and pending home sales at 10 a.m. There are a few earnings, including Toronto-Dominion, Dollar General, Dollar Tree, Royal Bank of Canada, Seadrill, Signet Jewelers, Chico's FAS and Abercrombie & Fitch before the open. GameStop, Splunk and Palo Alto Networks report after the closing bell.
Market dynamics, however, are likely to get the most attention.
West Texas Intermediate oil futures were at $49.75 per barrel in late trading Wednesday. Traders are watching for the $50 level, associated with a better environment for U.S. drilling companies that have been idling production.
"The $10 marks are psychological levels. The idea of being long above $50 with all the oil that's still around and, with the exception of U.S. production, there doesn't seem to be an interest by producers to cut. We need to see some more signs that demand is picking up across the globe," said Gene McGillian, analyst with Tradition Energy.
While McGillian said it's clear new long positions are being added in crude futures, there are a lot of temporary situations that could reverse, adding more oil to the market. The ramp up in summer gasoline production by refiners and summer driving season creates a temporary boost in demand. Also, the 1 million barrels a day offline due to Canadian forest fires are expected to return to the market.
"It doesn't seem to back off. This rebalance of the market continues. I'd like to say we're at levels where it's hard for the market to push higher, but we're not at a level where we're seeing people come in to sell. I think there's more to go," he said.
For now, the rally in oil is helping stocks and squeezing out short positions. Some drillers were sharply higher in active trading Wednesday. Transocean jumped more than 9 percent; Devon was up 5.6 percent, and Chesapeake was up more than 7 percent.
JPMorgan technical analysts Wednesday said they see new highs ahead for the S&P 500. "After correcting just over 4 [percent] from the 2,111 Apr 20 peak and meeting anticipated support at 2,012-2,033, the S&P 500 Index rebound has taken the market back toward the 2,100 area. …While more backing and filling below longer-term range resistance at 2,116-2,135 would not be a surprise, we continue to expect an eventual breakout to a new cycle and all-time highs in the weeks ahead," they wrote in a note.
But Bank of America/Merrill Lynch strategists and some others say there are a series of hurdles ahead for stocks, and the market may have a hard time getting past them unscathed. "Our view is that we think there's a lot of potential for a sell-off this summer, so potentially we could retest the lows we saw in February, that would be around 1,800. Our year-end target is still 2,000," said Jill Carey Hall, BoFAML strategist.
Hall said the market could easily see a 10 to 15 percent correction this summer. "The big risks are a Fed tightening, as we're still in a profit recession. We have the U.S. election coming up. We have the EU referendum," said Hall. She also said oil could become a negative again. BoFAML expects crude to end the year higher but it could first take another leg down to as low as $39, still well above the February lows of around $26 per barrel.
Peter Boockvar, chief market strategist at The Lindsey Group, said he believes the current rally is a "head fake" and investors are ignoring a weak earnings story, weak data globally and the potential for a pickup in inflation, particularly as oil and other commodities prices rise. "I think the market is way too complacent, and I expect another trip down to the 1,800 level if they raise. That would retest the February lows. They have another jobs number next Friday. What if they have another 150,000 level like they had last month? They could still go but it makes the whole situation more precarious."
The stock market's rally has been a surprise in the week since the Fed revealed in its April meeting minutes that it would like to raise rates next month if the data is strong enough.
Redler said he thinks the S&P could see 2,150 this summer. "Most sectors are above their 200-day moving average and their momentum moving averages, and technology has repaired itself since earnings season," he said. "If we could pause and hold above 2,070 and 2,075 in the S&P, then a move above 2,100 would be easier to be sustained."
Wald too said there are a lot of positive signs. "Oil broke its multiyear downtrend. At this point it's much more than a short squeeze, a recovery is taking place," he said.
There are two Fed speakers Thursday. St. Louis Fed President James Bullard speaks at 6:10 a.m. in Singapore, and Fed Governor Jerome Powell speaks on the economy and monetary policy at 12:15 p.m.
The big Fed event of the week will be an appearance by Fed Chair Janet Yellen on Friday, who is receiving an award at Harvard. There will be an opportunity for Yellen to comment, but economists believe a June 6 speech on the economy will be her real opportunity to send a message to the markets before the next Fed meeting in mid-June.
Redler said the best thing for the market might be for Thursday to be a quiet, listless day after two days of updrafts. "If we could get another day like Monday . . . ahead of Yellen on Friday, there might be a stronger platform to advance through," he said.