Rally hits choppy waters

NEW YORK (CNNMoney.com) -- Seemingly unflappable stock investors got dealt a few big blows last week, putting the continuation of the more-than-four-month old stock market rally in jeopardy.

Next week could be pivotal, as investors try to balance the broad optimism that has lifted stocks for months with concerns about just how quickly the economy is slowing.

On one hand, factors that have boosted stocks since the summer remain in place, including strong earnings, lots of merger and acquisition news, and a steady flow of money flooding into the market.

But on the other hand, one of the big factors that has supported stocks all fall seems to be wavering, namely, the perception that growth is slowing at the right rate to help mollify inflation without sending the economy into recession.

Although "there is a divergence of opinions among economists and strategists about the outlook for the economy, it's starting to look like we're seeing evidence of a more pronounced slowdown," said Jack Ablin, chief investment officer at Harris Private Bank.

He said that the broadly optimistic stock market is not really reflecting that yet, with even last week's spate of discouraging news not sparking much of a selloff.

Last week, the Dow fell 0.7 percent, the S&P 500 fell 0.3 percent and the Nasdaq lost 1.9 percent.

The declines were notable, after several up weeks, but pretty moderate, considering the run-up stocks have had this year.

In addition, last week saw the benchmark ten-year bond yield slump to a 10-month low, signaling the likelihood of a steeper economic slowdown than stock investors seem to be prepared for.

"With treasury bond yields being on a steady pace lower, you have to wonder if the bond market is seeing something about the economy that stocks are not," said Steven Goldman, market strategist at Weeden & Co.

Since bottoming in July, stocks have been on a tear. Year-to-date, the Dow is up 13.8 percent, the S&P 500 is up almost 12 percent and the Nasdaq composite is up 9.5 percent.

After such a run, "you've obviously got some tired blood," said Donald Selkin, director of research at Joseph Stevens.

Stocks are probably due to cool off a bit, Selkin said, and the excuse right now seems to be the falling dollar, the recent bounce back in energy prices and most notably, confusion about the pace of the economic slowdown.

In terms of the economy, last week brought its share of mixed signals. On the upside, the Fed's beige book, comments from Federal Reserve Chairman Ben Bernanke and the revision of third-quarter gross domestic product growth all alluded to a more moderate slowdown next year.

On the downside, reports showed more erosion for home prices, ho-hum November retail sales and contraction in the manufacturing sector on both a regional and national level.

The biggest economic reading on tap for the week ahead is the November jobs report, due Friday.

"I think we'll probably chop around, just go sideways until the employment report," said Selkin. "Hopefully, we'll get a decent report. If not, stocks are really going to get hit."

Ahead of the employment reading, reports are due on factory orders, the services sector of the economy and productivity (See chart for details).

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