Wall Street may extend its recovery push next week as investors bet that a further drop in oil prices will restrain inflation and boost prospects for profit growth.
The precipitous slide, fueled in part by a recovery in the U.S. dollar, has now taken oil prices to around $115 a barrel -- or more than 20 percent below a record set July 11.
A slide in energy prices is a welcome boost in an economy hamstrung by the housing slump and mounting mortgage losses in the financial services sector.
In the near term, consumers and business should feel some respite as energy costs recede, boosting prospects for a range of market constituents, including airlines, retail, industrial and technology sectors.
Financials are also a major beneficiary as investors shift money out of energy stocks in search for bargains elsewhere.
"I think the trend in stocks is up. I do feel that July 15 represented the bottom for stocks and we are going to move higher," said Bruce Zaro, chief technical strategist at Delta Global Advisors in Boston.
"I really feel that what investors are looking for right here is signs that the economy is starting to pick up right now."
And as the latest earnings reporting season is fast winding down, investors will have plenty of economic reports to watch next week.
In addition to keeping tabs on oil prices, investors will seek further direction from what will perhaps be the week's highlight -- Thursday's release of the July Consumer Price Index, a major gauge of inflation at the consumer level. Economists polled by Reuters expect the overall CPI to rise 0.4 percent in July, compared with June's gain of 1.1 percent. Core CPI, excluding volatile food and energy prices, is forecast to rise 0.2 percent in July vs. June's gain of 0.3 percent.
But before the CPI report, investors will pore over government data on the international trade deficit for June Tuesday, followed the next day by July reports on retail sales and import prices, and June business inventories. Friday's economic agenda will bring July data on industrial output and capacity utilization, as well as the preliminary reading for August on consumer sentiment from the Reuters/University of Michigan Surveys of Consumers.
On the earnings front, a slew of retailers, including Wal-Mart Stores , will help investors assess how much strain consumers face as home values slide and the squeeze from soaring food and energy costs takes its toll.
Best Week in Over 3 Months
"It looks like we are finally getting the break we've been waiting for in terms of slowing down the inflation spiral that has been taking place," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
"You have a tremendous rise in the dollar, and that's putting pressure on crude oil, which is helping to buoy U.S. equity markets."
U.S. stocks soared on Friday, capping a volatile week with their best weekly showing in more than three months.
On Friday, the Dow Jones industrial average surged 302.89 points, or 2.65 percent, to end at 11,734.32. The Standard & Poor's 500 Index shot up 30.25 points, or 2.39 percent, to 1,296.32. The Nasdaq Composite Index climbed 58.37 points, or 2.48 percent, to 2,414.10.
U.S. front-month crude oil settled Friday at $115.20 a barrel, down $4.82 for the day on the New York Mercantile Exchange. In post-settlement trading, crude tumbled more than $5 to $114.62 a barrel -- more than 20 percent below its NYMEX record high above $147 set in July.
For the week, the Dow average rose 3.6 percent, the S&P 500 gained 2.9 percent and the Nasdaq climbed 4.5 percent. It was the best week for all three indexes since April 20.
Fewer Jobs, Higher Prices
But even with the likelihood that stocks may extend their recovery push next week, Wall Street will still have plenty of reasons to tread lightly, particularly with recent signs pointing to further deterioration in the job market.
"Clearly, the economy is still weak. Some of the stimulus from the tax rebates is" ebbing, said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.
"I think the key to watch for is the unemployment number. Once you go above 6 percent, the concerns about recession will go up."
For July, the U.S. unemployment rate hit 5.7 percent -- its highest level in four years as employers cut jobs for a seventh straight month, according to the Labor Department's monthly payrolls report released a week ago.
Echoing worries about the economy's health, Alan Haft, president of Haft Financial, in Newport Beach, California, said that although oil prices may be sliding, inflation remained a threat, more so because the dollar's rebound will probably be short-lived.
"Look at the prices of food around the world. It's unfair to look at just the price of oil as the leading indicator of where inflation trends may be," Haft said. "There's strong likelihood that the Fed is going to have to start to raise interest rates to control inflation.
"For a long-term investor, I'd advocate slowly going back into commodities right now. Gold will be my favorite recommendation."
The agenda of U.S. Federal Reserve officials' public appearances happens to be thin. Federal Reserve Bank of Minneapolis President Gary Stern scheduled to speak about finance at an event on Thursday in Montana.
Federal Reserve Bank of Chicago President Charles Evans will speak about the economic outlook on Friday.