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Thursday Look Ahead: Dow to Flirt With 12,000 Again, Maybe Pull Back

The Dow’s run at 12,000 comes as market pros are debating when and how deep the market could correct.

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Sandra Baker | Photographer's Choice | Getty Images

The Dow 30 breached 12,000 for the first time in almost three years, but failed to close above it. The Dow rose 8 to 11,985. The S&P 500 rose 5, to 1296, just a hair below the key 1300 level.

“It could come here or it could come at 1350. Who knows? But the things I see going for it are that in mid-December, the rate structure stopped going up and I still think that’s important,” said James Paulsen, chief investment strategist at Wells Capital Management.

Two other factors hurting stocks – rising oil prices and the stronger dollar – have also reversed course. “The three things that caused the summer slowdown just aren’t there today,” he said.

What to Watch

Investors are watching several key economic reports Thursday, including weekly jobless claims and durable goods, both at 8:30 a.m. Pending home sales are at 10 a.m.

There is also another big wave of earnings from Procter and Gamble, Colgate-Palmolive, Lockheed Martin, Time Warner Cable, Raytheon, Under Armour, Bristol-Myers Squibb and Altria, to name a few.

Amazon.com and Microsoft report after the closing bell.

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Paulsen also said the fourth quarter earnings season has been an important catalyst. “The difference in this earnings season is not that companies are outperforming their earnings estimates. That’s been going on. It’s the CEO commentary about the future that is much more aggressive. It shows a greater confidence among CEOs,” he said. The pickup in merger activity and IPOs send the same message.

Andrew Burkly, director of equity strategy research at Brown Brothers Harriman, said the earnings season has also brought with it higher forward expectations. Analysts have raised their forecasts for the S&P 500 earnings for the year to $97. That would be a record level and is above his $95 forecast.

So far, 144 S&P 500 companies had reported earnings by Wednesday morning. Of those, 69 percent have beaten earnings estimates and 74 percent beat revenue estimates, according to Thomson Reuters.

Burkly expects companies to start to see a slowdown in margin growth. Starbucks, for instance, forecast Thursday that rising sugar, milk and coffee prices could take $0.20 per share off its earnings this year, double its previous forecast.

Correction?

Burkly does expect to see a substantial market correction. He is forecasting 1350 for year-end on the S&P 500, and says the market could trade on both sides of 1300 several times this year.

Paulsen is forecasting 1450 on the S&P by year-end. “I don’t think it’s going to be a straight line. I think there’s still a correction a long the way,” he said.

“The bad thing is there’s just a lot of optimism. I would suggest that if we saw a 5 percent pull back and a bad three weeks of econ reports, and the bears will be back,” he said. “If it’s so great out there, why is the Federal Reserve still easing?”

Fed Fans Risk Rally

On Wednesday, the Fed reaffirmed its plan to purchase $600 billion in Treasury securities and noted that the economy is improving but not enough. The Fed’s “quantitative easing” program is seen as favorable to risk assets, and has helped propel stocks since the Fed first discussed it in late August.

Treasurys were weaker and held onto losses after the Fed news. The 10-year was yielding 3.41 percent.

RBS Treasury strategist John Briggs said he expects the auction at 1 p.m. Thursday of $29 billion in 7-year notes to go well, after Wednesday’s 5-year auction drew good demand. He said typically the 7-year does better because it is the last for the week.

He said the bond market basically gave back gains made Tuesday as news reports highlighted the fact that President Obama would announce a spending freeze in his State of the Union Address. But Briggs said the market was disappointed by the narrowness of the freeze.

The Fed’s post-meeting statement, released Wednesday afternoon, was as expected. The Fed did, for the first time, acknowledge rising commodities prices but said U.S. inflation has been trending downward.

Oil Drill

Traders in all markets are increasingly watching Egypt, which has seen a surprise wave of protests this week against President Hosni Mubarak. So far oil prices have not reacted to the news, but traders say it’s a matter of how far it goes.

“I would not want to be short oil watching this go on,” said Ray Carbone, president of Paramount Options.

Traders have said Egypt is not a big exporter of oil, but it is a key U.S. ally in the region. Cambridge Energy Research Chairman Dan Yergin said Egypt's “real significance is its role as a bulwark of stability.”

So far the protests, which have been banned by the government, are just an event the market is monitoring, Carbone said. “Egypt has no effect on the oil market as a player. It’s neglible. If all of a sudden, Egypt couldn’t export oil, maybe there’s a short-term, short covering rally. It’s not important. The crux comes in if it effects these others countries where governments are not popularly elected, and the biggest one is Saudi Arabia,” Carbone said.

After the Bell

Netflix stock jumped above $200 in late trading after it said profits increased 52 percent to $47 million, or $0.87 per share, beating expectations.

- Follow me on Twitter @pattidomm.

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