NEW YORK (CNN/Money) -
After suffering flu-like symptoms for a long stretch, U.S. stock markets are suddenly looking a lot healthier. How they fare in the coming week could say a lot about whether this is a short-term bounce or a longer-lasting rally.
Aside from a brief move higher in late March/early April, stocks have been falling since late January, driven in part by worries about inflation and an impending Federal Reserve interest-rate hike, with some geopolitical worries and rising oil prices thrown in for good measure.
Technical market indicators got so gloomy, in fact, that many analysts started to believe the market was oversold and due for a bounce. Last week, it seemed, the bounce arrived. The Dow Jones industrial average gained 2.2 percent, the S&P 500 gained 2.5 percent and the Nasdaq gained 3.9 percent.
Much of the rebound had to do with the price of oil, which mercifully dipped on Thursday below $40 a barrel on the New York Mercantile Exchange.
What's more, several economic indicators came in weaker than expected during the week. There once was a time when the market reacted badly to bad news, but -- in case you didn't get the memo -- bad news has lately been good news. (For a list of some of the key news items expected this week, click here.)
That's because any signs of a robust economy or stronger job growth have raised fears that runaway inflation is right around the corner, which might force the Fed to tighten abruptly, which would not be good for stocks. Stocks suffered in 1994, when the Fed last went on an abrupt rate-hiking spree.
But recent signs of an economic deceleration, among other factors, have helped bring U.S. Treasury yields back down a bit. And investors may be starting to believe that the economy is neither too hot nor too cold, but just right -- the always-elusive "Goldilocks" economy.
"The market is asking the question, given oil prices, given rates, given China's economy and other things, what does it look like for the economy and corporate profits in the fourth quarter and in 2005?" said Hugh Johnson, chief investment officer at First Albany. "The message we got last week was that it's probably not going to be as great as everybody once expected, but it will still be just fine."
Technical analysts were encouraged by the activity in the market last week. Sometimes a bounce from an oversold level is short-lived and soon followed by another decline. Not in this case. Many more stocks moved higher during the good times last week than fell; such "breadth" is another good sign. Despite the bounce, the ratio of bearish "put" options to bullish "call" options is still high -- a contrary indicator that makes technical analysts happy.
Still, not all analysts are popping champagne corks. They'll need to see such good signs continuing this week, and probably beyond, before they'll be convinced.
"The markets were in a position to do a trading bounce, and that's what they've done," said Elaine Yager, senior vice president for technical analysis at the Maxim Group. "I would have to say we're still in the confines of trading ranges. If the market strengthens more and trading positions turn into holding positions, we'll see how it plays out."
Ignoring the job report?
The most critical economic news comes at the end of the week, when the Bureau of Labor Statistics releases its always-hotly-anticipated unemployment and non-farm payrolls report.
A super-weak jobs report could trigger a bond-market rally, Yager suggested, by raising doubts about the chances of a Fed rate hike. Bond traders hate higher rates, since bond prices move in the opposite direction. Lower interest rates could in turn encourage a stock-market rally.
On the other hand, if markets are looking for Goldilocks, then a weak report could make stocks trade lower.
"Sentiment can change overnight," said Ralph Acampora, chief technical analyst at Prudential Financial. "Good news is good news again."
Confused yet?
In any event, most economists believe the recent strong job gains will continue in Friday's report, but slow down from the dizzying heights of March and April -- something like a Goldilocks scenario.
If that's true, then markets will likely shrug at the jobs report, since it will only confirm what they've already known -- a Fed hike is coming soon.
Key events in the week ahead:
- Tuesday morning, the Institute for Supply Management releases its closely watched index of manufacturing activity in May. Economists, on average, expect the index to dip to 61 from 62.4 in April, according to Briefing.com.
- Also on Tuesday, outplacement firm Challenger Gray & Christmas issues its tally of job-cut announcements for May. The report's not always a market mover.
- Thursday morning, the Labor Department reports the number of new claims for unemployment benefits in the week ending May 29. There's no consensus estimate yet, but economists likely hope the number of claims will fall from the previous week's unexpectedly high 344,000.
- Later Thursday, the ISM will release its index of non-manufacturing activity in May. Economists expect the index to dip to 66 from 68.4 in April.
- Also Thursday, the Census Bureau will report on factory orders in April. Economists, on average, expect orders to rise just 0.4 percent, following a 3.4-percent jump in March.
- Friday morning, the Bureau of Labor Statistics releases its figures for May unemployment and payroll growth. Economists expect the unemployment rate to hold steady at 5.6 percent and think 215,000 new jobs were added in the month, compared with 288,000 in April.
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