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Week Ahead: Stocks Could Stay Stalled Until After Fed Meeting

Stocks may have a hard time finding traction ahead of the Fed's Tuesday meeting, but the trend for the market is clearly higher, strategists say.

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Oliver Quilla for CNBC.com
NYSE Traders

The Fed is not expected to take any action on rates or change the key language about its intentions, but Fed watchers are looking for any nuance in its thinking on the economy or its temporary programs. Industrial production, housing starts and inflation data are among the week's economic reports.

The Dow and S&P 500 rose less than a percent in the past week. Daily trading was punctuated by shallow swings that did end up pushing the S&P to a 17-month high. The Nasdaq rose a more robust 1.8 percent, finishing the week at 2367. The S&P closed at 1049, and the Dow was at 10624.

The financial sector was a star performer, gaining 2 percent. Citigroup and AIG led the week's gains, but the higher quality names in the group also moved higher. Sen.. Christopher Dodd, D-Conn. is expected to introduce his financial regulatory reform bill Monday, but without bipartisan support.

"They're going to resolve the financial reform bill and it's going to clear the air. They'll take bad news better than no news. That's what's cooking, and I'm fully invested. It's been a roaring year and it isn't over," said David Kotok, CEO of Cumberland Advisors.

Citigroup stock gained 13 percent in the past week and traded several hefty billion share days, after it successfully placed a preferred offering. "The lesson on Citi is when you hate them long enough and investors realize there's no Armageddon and sentiment reverses from a 'deeply oversold, washed out, everything is wrong mentality,' stocks turn and soar. Citi is in the process of doing that right now and the moving of the stock itself triggers analysts to rethink their negative views and that creates the pile on affect," he said.

BlackRock vice chairman Bob Doll said he doesn't think the financials are falling into a new leadership role, however. "I think financials will continue to be a high beta group in both directions. I don't think financials will lead the market. I think it's quality that will be, across a lot of different sectors, and it's going to be companies that show the goods, and I mean earnings and revenues," he said.

Doll said the market's current stall out is not unexpected at this stage in the market's run. "I think the stall out is about headwinds to P/Es. This isn't going to be about last year, smooth sailing," he said. "...We need something to break through. I do think it's the jobs thing. If there's going to be job growth by definition there will be income growth and that will increase confidence so business will spend more," he said. March's employment report could show a gain of 100,000 plus, said Doll.

Credit Un-Crunch

By no coincidence, credit markets were humming in the past week as financial stocks gained. Even with more than $200 billion in Treasury issuance, a rush of debt issuers flooded the market, in the biggest week for investment grade corporate issuance since Feb. 1. Junk bond spreads continued to narrow and high yield investments are now on track for the best monthly performance in six months.

Corporations issued $27.8 billion in investment grade debt and $8.13 billion in high-yield this past week, according to Thomson Reuters IFR.

"What we're seeing this past week is the risk appetite returning after it became apparent that we're not going to see contagion from Greece," said Zane Brown, Lord Abbett credit strategist. Greece is expected to provide a budget plan to the European Union Tuesday.

Brown said corporations and the U.S. government weren't the only ones tapping the market. There was an expanded $2.5 billion offering from California in the past week and a batch of sovereign offerings. "Emerging markets are on track with $30 billion for the largest quarter of debt raised by developing nations since 2005," he said.

He expects to see another big week of issuance in the coming week. "I remember four weeks ago, we had spreads over 700 basis points in high yield because everyone was so fearful...that 700 is now down to 615. We've had nine straight days of narrowing," he said. Brown said the rapid move is unusual, and he expects to see a positive spillover into stocks at some point.

"The other thing is Moody's is now predicting a default rate of 2.9 percent by the end of the year from 12.5 percent in January, and 11.6 percent for February," he said. Brown said over the past decade, the high yield default rate was about 3.8 percent, so 2.9 is surprisingly low and would indicate an improved economic picture.

Some traders though were skeptical of the surge in appetite for offerings and pointed to the way some sovereigns sopped up funds with a wary eye. Turkey, for instance, issued an 11-year, dolla- denominated bond at a record low yield for that country Friday—just 203 basis points above U.S. Treasurys.

Consumers Signal 'Return to Normalcy'

The Fed is the big headline maker this week when it comes to the economy and some traders expect a negative response from stocks, even if the Fed makes little news.

"I think they need to see some job growth before they go a lot further in their exit strategy," said Doll, adding the Fed will need to see several months of growth before moving on rates. "My view is they will raise rates before the end of the year, post the election before the end of the year."

Brown said the credit market activity is just what the Fed was looking for. "When (Fed Chairman Ben) Bernanke looks at this, it's exactly what they're hoping for—this return to normalcy. Even though banks are not lending money, we now have financial markets returning to normalcy and providing the financing people need. A large part of that financing allows them to refinance of higher cost debt and be in better shape than they would have been," he said.

In the past week, the surprising gain 0.3 percent in February retail sales gave encouragement to economists who see signs the consumer is showing early signs of recovery. "It's consistent with real consumer spending growing 3.25 percent over all in the first quarter. That's about a half a percent stronger than we thought," said Citigroup economist Steve Wieting.

"So many people viewed a consumer rebound as impossible, and month after month, it's in their face," he said. Investors will get another look at the consumer's health Monday when credit card issuers report master trust data.

The Producer Price Index is reported Wednesday and the Consumer Price Index is out on Thursday. Industrial production is reported Monday. Housing starts and import prices are released Tuesday, and the Philadelphia Fed survey and leading indicators are issued Thursday.

Doll said stocks will stay on their current course if the data doesn't disappoint, as it did in February. "We just can't have negative surprises. The numbers can be ho hum but we just can't have negative surprises," he said.

Weekly jobless claims are also reported Thursday. "Over the course of March, we've got to see claims data decline if it's going to be consistent with the (February) employment report," said Wieting. He said the unemployment claims have been negatively impacted by winter storms on the east coast, and he expects them to improve.

What Else To Watch

Investors will also be watching Washington for movement in the health care reform legislation this week.

For the oil markets, OPEC meets in Vienna Tuesday and Wednesday.

There are just a few earnings. FedExreports Thursday, and Discover Financial reports Tuesday.

Questions? Comments? Email us at marketinsider@cnbc.com