Rally's fate hinges on Fed, home sales

By Caroline Valetkevitch
NEW YORK (Reuters) - Without further signs of life in the lackluster economy or hints from the Federal Reserve the outlook is improving, stocks' three-month rally may run into more obstacles next week.
Investors will assess data on new and existing home sales that could point to whether the battered housing sector has bottomed. They will also keep an eye out for profit forecasts or warnings as the second quarter draws to a close.
"The kamikazes who ran the market up three months ago have now paused ... I'm in a situation where I say, 'prove it to me.' I want to see a trend where it really is a little bit better," said Cummins Catherwood, managing director at Boenning and Scattergood in West Conshohocken, Pennsylvania.
The Fed is widely expected to leave rates unchanged after its two-day meeting ends Wednesday, but investors will closely check its statement for clues on the central bank's economic outlook.
All three major U.S. stock indexes ended the week lower, with weaker-than-expected regional manufacturing data on Monday giving the week a negative tone from the start. The Dow Jones industrial average .DJI fell 3 percent, while the Standard & Poor's 500 .SPX index lost 2.7 percent and the Nasdaq .IXIC dropped 1.7 percent.
The benchmark S&P 500 has gained 36 percent since hitting a 12-year closing low in early March, but investors have been eager for signs that early hopes of an economic recovery aren't false.
"I do think now that we're up here, and we're priced for some good news, it's going to be important we have some follow-through," said Frank Lesh, futures analyst and broker at FuturePath Trading LLC in Chicago.
Some other data next week that could shed some light on the economic outlook will include durable goods orders, personal income and spending data, and weekly jobless claims.
FED AND EARNINGS WATCH
While expectations are that the Fed will keep rates steady next week, the question is: How long will the Fed keep rates near historic low levels? The Fed's last decision on rates was in December, when it cut the benchmark fed funds rate to almost zero from 1 percent.
"They will probably have to send a clear, credible signal that rates are not going to be raised in 2009 or even in the first half of 2010," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.
In the coming week, Federal Reserve Chairman Ben Bernanke is scheduled to testify on Thursday at a congressional committee hearing on the Bank of America-Merrill Lynch merger. This week, Representative Edolphus "Ed" Towns, a Democrat from New York, issued a second subpoena on Friday to the Fed seeking more documents, dating from last September through January, on the closed-door merger talks.
With the second quarter ending June 30, investors may see some pre-announcements from companies that could provide a better picture of how the corporate reporting period will look. Outlooks for the third quarter also will be crucial.
U.S. corporate earnings, a major influence for the stock market, have been slow to recover since the recession. Data compiled by Thomson Reuters shows a decline in second-quarter earnings of 34.4 percent from a year ago.
"What's going to drive the market is the third-quarter outlook when companies report second-quarter earnings," said Jim Awad, chairman of W.P. Stewart & Co. Ltd. in New York. Continued...
Source: Reuters