Stocks swung higher into the new year and could continue an upward drift as the fourth-quarter earnings season gets going.
The first major Dow component, Alcoa , reports earnings Monday and there are just several more major names—JPMorgan Chase and Intel —reporting later in the week. Analysts expect corporate profits to mostly show improvement from last year's period, when the big deluge of earnings news starts after the middle of the month.
Most of the action in the week ahead will come from a heavy dose of economic reports, including December retail sales and the Fed's beige book on the economy. The Treasury also auctions another $80 plus billion in notes and bonds in the coming week.
The Dow gained 1.8 percent to 10,618 in the first week of 2010, while the S&P 500 rose 2.7 percent to 1144. There were some quiet days in the past week as the indices moved slightly, but markets saw heavy action under the surface as investors rotated fresh money into favored sectors. The big S&P sector winners: financials, materials, energy and technology—all of them up more than 5 percent for the week.
"I think we start the year with a lot of momentum and move higher," said Jack Ablin, chief investment officer at Harris Private Bank. Ablin said he hates to admit it, but right now his view fits the consensus in that he sees the market moving higher through the first half before falling off later in the year.
Ablin pointed out that the S&P 500 in the past week was roughly 18 percent above its 200-day moving average. "We went back to 1926, and three-quarters of the time (the market was at that level), it moves higher over the next year and the average return is 16 percent. I would say we have had a running head start into 2010 with a lot of momentum," he said.
"It's going to take a market that is fully valued and turns it into an expensive market, and maybe in May or June, it will roll over and then we're going to sell, raise cash and get out," he said.
Ablin said he is still "pro cyclicals," since his first half view is positive. He likes financials, consumer discretionary, basic materials and technology. "My sense is the weaker dollar is ultimately going to help industrials, but I think the big surprise that people aren't really talking about is trade," he said. "...it is remarkable there's a chance we would see a positive trade balance through the course of the year."
He said earnings should see double-digit gains and could be a catalyst for stocks.
However, he said one issue that could disturb markets later in the year is the expected shortfall in state budgets. "June 30 is the fiscal year for all states. These states have spent this fiscal year expecting a certain revenue roll and they haven't gotten it," he said. Analysts also expect the growing federal budget deficit to become a bigger factor for markets and the wind-down of federal stimulus money.
"I don't think the Fed touches rates until 2011, but I do think a lot of this fiscal stimulus is going to start wearing off, and that's probably in the third quarter," he said.
But for now, stocks should keep making gains. "I just think we could still see a nice steady market...There's a lot of power to inertia, and that's what I'm going with," Ablin said. "I'm still overweight, even though I think we're full-valued." He said he does expect the rising market to eventually suck in the cash sidelined in money market funds and elsewhere.
"I think if the market surprises people to the upside, they'll keep jumping back in. It'll feed on itself, and once it turns, I'd rather sell first and ask questions later," he said.
The US Dollar, and What Else to Watch
The big number in the coming week is December retail sales, expected on Thursday. Citigroup economist Steve Wieting expects to see a gain of 0.4 percent, and 0.2 percent, not including autos.
Economists have been paying close attention to the behavior of the consumer during the holiday season, and December is the prime month for that spending. "We included forecasts through January, when looking at the holiday season. November was weaker than expected, and December was stronger than expected. I'd say concern about gasoline didn't come through early in the period, but it might come through in the later period post-Christmas," he said.
J.P. Morgan chief U.S. equities strategist Thomas Lee said one of the key events he is watching in the coming week is the release of credit card data from major card companies. That master trust data is released Friday. He said the data should be telling about the health of the consumer.
Other data includes the NFIB small business survey Tuesday and the international trade data for November. The Fed releases its beige book on the economy Wednesday afternoon. In addition to retail sales, weekly jobless claims, import prices and business inventories are reported Thursday. Friday's data includes CPI, the Empire State survey, industrial production and consumer sentiment.
Wieting said the jobs data continues to show improvement, despite the fact that the Friday non-farm payrolls number was at negative 85,000, below the consensus level of zero. "We're moving in the right direction," he said. Wieting had expected job losses of 50,000.
The Treasury auctions $10 billion in 10-year TIPS Monday; $40 billion in 3-year notes Tuesday; $21 billion in 10-year notes Tuesday, and $13 billion in 30-year bonds Thursday. There are also billions of dollars in Treasury bills at auction. The 10-year closed out the past week higher, which lowered its yield to 3.808 percent. The two-year yield slid to 0.968 percent.
The dollar slipped 0.6 percent against the euro in the past week to a level of $1.4417, and 0.4 against the yen.
"The main thing in currencies we're going to be watching is that we had the dollar higher for the first two weeks of December, and then we moved into a range of consolidation," said Brian Dolan of Forex.com. He said the dollar is currently in a range of $1.4250 to $1.45 against the euro.
He said a big development in the market recently is also the yen's move lower. At the same time, he said the dollar appears to be decoupling from the recent popular "risk on" trade where it moved lower, as risk assets like commodities and stocks moved higher.
"The yen crosses are back as the preferred carry trade. We're going to back to 2005 and 2006 trading patterns, where when risk is on, the yen dollar crosses will rally and when risk is off, they'll be sold. The dollar has decoupled, I think significantly, from the risk trade and the yen is now the primary fulcrum for that," he said.
He says the dollar could make gains if the U.S. data is strong or rates start to firm. "For the year, we're looking at bumpy, bumpy sideways. It'll be a great short term trading environment, but we're not likely to see a major trend developing," he said.
Oil in the past week gained 4.3 percent, to $82.75 per barrel. Gold rose 3.9 percent, or $43 to $1138.20 per ounce.
What Else to Watch
There are a few Fed speakers out in the coming week, starting with Atlanta Fed President Dennis Lockhart, who speaks on the U.S. economic outlook at the Atlanta Rotary Club Monday. Dallas Fed President Richard Fisher speaks Tuesday evening in Dallas, while Philadelphia Fed President Charles Plosser speaks in Philadelphia that same evening.
Chicago Fed President Charles Evans speaks in Iowa Wednesday, and Richmond Fed President Jeff Lacker speaks on the economic outlook Friday.
Former Fed Chairman Paul Volcker, who chairs the President's Economic Recovery Advisory Board, speaks at the Economic Club of New York Thursday at 12:15 p.m.
The Bank of International Settlements meets over the weekend in Basel, Switzerland. Central bankers from around the world are attending, and some key U.S. bankers have been invited to attend.
Dolan said he hasn't heard a lot of talk about the BIS meeting in the market. "It sounds like a consultive conclave, where they're going to get reviews from both sides," he said.
Some major conferences could get attention this week, including J.P. Morgan's annual health care conference. The four-day conference runs through Thursday and will feature 300 plus companies, presenting to some 7,000 attendees.
The Detroit Auto Show kicks off in the Motor City Monday. The third annual "Inside ETFs" conference is in Boca Raton, Fla. Sunday through Tuesday.
— Questions? Comments? marketinsider@cnbc.