The stock market's easy glide higher could continue in the week ahead, as its steady advance draws in fresh money.
"Let the new bulls lead the charge over 1300. There are new bulls left and right, all over the place. Our S&P target stays at 1400, but 1500 is more likely."
Investors, though, will continue to watch for signs of a pullback, now that the market is up nearly 6 percent since the start of the year. Some of the topics that concern them are Middle East unrest, creeping inflation and rising interest rates.
Both consumer and producer inflation data are reported in the coming week, as well as retail sales, housing starts and the minutes of the last Fed meeting. There are also some key earnings, such as Dell and Deere.
"All eyes are on the bond market," said David Bianco, Bank of America Merrill Lynch chief U.S. equities strategist. The yield on the 10-year Friday was at 3.644 percent, down from its week highs above 3.7 percent, and close to where it ended the previous week. But the recent move up in interest rates has caught the attention of some in the stock market.
'If interest rates stay below 4 percent (10-year yield) in the first half and 4.5 percent in the second half of the year, we think all of the tail risks stay dormant," said Bianco.
"We want to see that the data shows the economy is growing at 3.5 percent, slow improvement in jobs and the Fed wrapping up its asset purchase program in the spring. We just want to make sure the bond market takes all these things in stride," he said.
He does expect interest rates to stay at benign levels. "Our view is they drift higher. We're expecting 4 percent by the end of 2011 and 5 percent in 2012," he said.
Stocks closed out the week with impressive gains, after Egyptian president Hosni Mubarak was forced to step down Friday. The Dow was up 1.5 percent to 12,273, and the S&P 500 was up 1.4 percent at 1329. The best performers for the week were consumer discretionary stocks, up 3.5 percent, followed by the growth plays of industrials and financials, both up 2.9 percent. The worst performers were energy, down 0.3 percent and health care, which was flat.
Oil was briefly pumped by fears Egypt would fall into chaos, but it sold off on Mubarak's exit, to end the week at a 10-week low of $85.58 per barrel.
Richard Bernstein, CEO of Richard Bernstein Capital Management, said the market is more inclined to trade on improving U.S. economic news than the Egypt story, which remains uncertain.
"The Fed will release its new projections, so that will be quite interesting to see what the Fed does exactly. We would expect them to lower their unemployment rate forecast a bit, and perhaps edge up on the growth forecast."
"Oil has done nothing. Gasoline has come down the past week. Gold has basically done nothing but Treasurys were selling off," said Bernstein. "The reason Treasury bonds are selling off is simply because the U.S. economy is getting better. It's the most improving economy in the world and small cap companies in the U.S. are the greatest growth story in the world."
Traders are watching the market's move higher warily, as fresh economic data and earnings news continues to support prices. Yet, they all point to a powerful momentum behind the move. "I call it the Isaac Newton rally. A body in motion stays in motion," said Art Cashin, director of floor operations at UBS.
Oppenheimer Asset Management chief market technician Carter Worth this week said he expected the market to take a breather in the near future, as the S&P 500 trades in the 1330 area, close to its current level. "We're likely to start to do some backing and filling here at the 1330+/- level...allowing stocks to rest," he wrote. Worth said it is more likely the market will move sideways for a period of time, rather than see a deep sell off.
Worth's target is 1400 for the year. Bianco also expects the S&P at 1400 by year end.
"Let the new bulls lead the charge over 1300. There are new bulls left and right, all over the place. Our S&P target stays at 1400, but 1500 is more likely," Bianco said, adding that he's putting an 80 percent chance on continued economic improvement and earnings of $100 per share or higher on the S&P next year. "There's a 20 percent chance one of the pitfalls does us in," he said.
Barclays chief U.S. economist Dean Maki said he'll be watching January retail sales Tuesday, industrial production Wednesday and CPI on Thursday. "The release that should matter probably the most is retail sales report on Tuesday. We're looking for 0.6 percent, ex-autos, 0.4 percent core. It's important to see if the strength we saw in the fourth quarter is carrying over into Q1," he said.
Import prices, the Empire State survey, business inventories and the Treasury's international capital flow data are also released Tuesday. Housing starts and PPI are reported Wednesday, and weekly jobless claims, the Philadelphia Fed survey and leading indicators are reported Thursday, in addition to CPI.
Maki said he expects CPI rose 0.3 percent, and core 0.1 percent in January. "We believe there will be more upward pressure on food and energy prices than core. For our own purposes, we tend to focus on headline for where inflation is, and we think headline will be rising by the end of the year. We expect it to be 2 percent," he said. He expects headline inflation to be running at a 1.5 percent year over year in January, and core, minus food and energy, to be at a 0.8 percent year over year rate.
The Fed, meanwhile focuses on core. "We do think this could lead to a disconnect, especially as we roll forward when overall inflation runs faster than the Fed would like, because core, I think will be in the Fed comfort zone, and we think the Fed will look through it," he said.
Goldman Sachs stock strategists, in a note Friday, said inflation is the number one topic raised by investors. It is indeed an undercurrent in the markets and the subject of discussion in the bond market, where traders debate whether it is strong economic news or inflation fears behind the rate rise. Goldman analysts said investors are focusing on the potential impact on profit margins and the impact inflation would have on bond yields and the implication for stock prices. The analysts point out they do not see a risk from inflation in the U.S.
Brian Dolan of Forex.com said he will also be watching for inflation news from China Tuesday and the U.K. Wednesday. China's trade balance is also released this week. Japanese GDP is reported Monday morning and it is expected to be a negative 0.5 percent, he said.
"It's not a good thing when the third largest economy slips into negative GDP. We might see some further risk unwind," Dolan said.
"Fed minutes could be more interesting"
In addition to data, the Fed will release the minutes of its last meeting Wednesday afternoon. "The Fed will release its new projections, so that will be quite interesting to see what the Fed does exactly. We would expect them to lower their unemployment rate forecast a bit, and perhaps edge up on the growth forecast," Maki said.
Fed Chairman Ben Bernanke speaks in Paris on global imbalances and financial stability Friday morning.
CRT Capital chief Treasury strategist David Ader said the bond market's focus will be on the Fed's market purchases of Treasurys, under its quantitative easing program. The Fed is expected to be in the market every day in the coming week.
"I think the Fed minutes could be more interesting than they typically are. When Bernanke spoke two weeks ago to Congress, he said the same thing, When he spoke this week, there was a shift. He was a little bit more optimistic. He referenced accommodation in a different way," he said.
Monday's earnings released include Marriott, Masco, FMC, Diebold, MGM Resorts and Agilent.
Barclays , CIT, Qwest, Sirius XM Radio , Omnicom, Watson Pharmaceuticals, Marsh an McLennan and Warner Chilcott report Tuesday morning. Dell , Analog Devices and Tesla report after the bell Tuesday.
Wednesday's reports include Comcast , the parent of CNBC, Cablevision, Dean Foods, Genzyme, Devon Energy, Owens Corning and Deere . CBS, NetApp, Nvidia and Cliffs Natural Resource report after the bell Wednesday.
Apache, Barrick Gold, Dr. Pepper Snapple, Duke Energy, PG&E, Williams Cos, Waste Management, and JM Smucker report Thursday morning, and Nordstrom , Intuit, CF Industries, Clearwire, and SunPower report after Thursday's close.
Campbell Soup, Calpine, Brookfield Asset Management and Pinnacle West report Friday.
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