Wall Street: Vulnerable after the runup

Stocks have surged 50% since March, reassuring investors, but also setting up a possible retreat. The Fed, the consumer and inflation will be in focus this week.

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By Alexandra Twin, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- Wall Street has spiked nearly 50% in less than five months -- and that's both good and bad.

The advance has been driven by factors including relief that the financial system is not about to implode, signs that the economy is recovering, and most recently, a spate of positive earnings surprises. On Friday, the July jobs report showed the labor market is starting to show signs of bottoming.

The advance has left the major stock gauges at more than 9 month highs, but it's also left stocks vulnerable to a bigger pullback as some investors consider bailing out after such a big run.

"We've gone from pricing in a depression, a recession, and now a recovery, in only five months," said Jeff Kleintop, chief market strategist at LPL Financial.

He said that investors are feeling more enthusiastic, but some of the enthusiasm is going to be capped by the fact that the market has already gone a long way toward accounting for those recovery hopes.

In addition, the recent spike in commodity prices has reintroduced the topic of inflation, something the Federal Reserve may address at its policy-meeting this week.

Other than a brief pullback in late June-early July on jitters ahead of the quarterly results, the market has basically been on the rise since bottoming on March 9. After closing at more than 12-year lows, the S&P 500 has now risen just shy of 50% as of Thursday's close.

Fed meeting: The central bank holds its two-day policy meeting this week, with a decision on interest rates and a statement due for release Wednesday at around 2:15 p.m. ET.

The central bank is widely expected to keep the fed funds rate, a key overnight bank lending rate, at historic lows near zero. But as always, the bank's statement has the power to move markets.

Fed chief Ben Bernanke has said that the bank will keep taking steps to assure a bottom in markets and the economy, but will stay mindful of inflation, said Wan-Chong Kung, senior fixed-income portfolio manager at FAF Advisors. The statement Wednesday is likely to echo that theme.

"I think they'll continue to assure investors that the Fed won't fall asleep at the switch on inflation, but also won't take away what's been helping to support the recovery," she said.

Quarterly results: Dow component Wal-Mart Stores leads the list of retailers reporting quarterly results this week, as the profit reporting period winds down.

"This week is heavy with retailers and with the consumer in focus for the markets, it will be important," said John Butters, senior research analyst at Thomson Reuters.

He said Wal-Mart's earnings in particular will be closely watched, as it is something of a proxy for the consumer.

Currently, 73% of companies have reported better-than-expected results versus the long-term average of 61% of companies. Should that number hold up, the second quarter would tie with the first of 2004 for the highest percentage of positive earnings surprises.

But better-than-expected results doesn't mean corporate profits are recovering just yet. With 85% of the S&P having reported results, profits are currently on track to have fallen 28.3% from a year ago, according to earnings tracker Thomson Reuters.

That stretches the number of consecutive quarters of profit declines to 8, the worst in Thomson's 15 years of tracking, said John Butters, senior research analyst at Thomson Reuters.

Treasury auctions: The U.S. government is auctioning $75 billion in debt as it works to fuel the budget deficit and economic recovery efforts. Treasury will offer $37 billion in 3-year notes Tuesday, $23 billion in 10-year notes on Wednesday and $15 billion in 30-year bonds on Friday.

Investors will be watching to see what kind of demand the auctions get, particularly as the government was initially expected to announce a larger offering.

On the docket

Monday: There are no market-moving economic reports scheduled for Monday.

Tuesday: The Labor Department releases the initial reading on second-quarter productivity in the morning. Business productivity is expected to have gained 4.9% after rising 1.6% in the previous month, according to a Briefing.com survey of economists. Unit labor costs are expected to have fallen 1.9% in the quarter after rising 3% in the first quarter.

The June wholesale inventories report from the Commerce Department, due in the morning, is expected to show a decline for the 10th month in a row, dropping 0.9% after falling 0.8% in May.

The Fed meeting gets underway in the morning, concluding Tuesday.

After the close, Applied Materials (AMAT, Fortune 500) releases results. The chipmaker is expected to report a loss of 8 cents per share, according to Thomson Reuters. Applied Materials earned 15 cents a year ago.

Wednesday: Due in the morning, the June trade gap, from the Commerce Department, is expected to have widened to $28.5 billion from $26 billion in May, a 10-year low.

The weekly oil inventories report from the Energy Information Administration is due in the morning and the July Treasury budget is due in the afternoon.

The Fed decision is due at around 2:15 p.m. ET.

Thursday: July retail sales, released by the Commerce Department, are expected to show modest growth. Sales likely rose 0.3% after rising 0.6% in June. Sales excluding volatile autos are expected to have written 0.1% after rising 0.3% in June.

The weekly jobless claims report from the Labor Department is also due in the morning, along with readings on July import and export prices and June business inventories.

Wal-Mart Stores (WMT, Fortune 500) releases its quarterly results before the start of trade. The Dow component is expected to have earned 86 cents per share, just as it did a year ago.

Friday: The Consumer Price Index (CPI) for July is expected to come in unchanged, as inflationary pressure remains benign. CPI rose 0.7% in June. The so-called Core CPI, which strips out volatile food and energy prices, is expected to have risen 0.2% after rising 0.2% in June. The Labor Department releases the report.

After the start of trading, the University of Michigan releases its initial reading on consumer sentiment in August. The index is expected to have risen to 68.5 from 66 in late July.

Readings on July industrial production and capacity utilization are also due. To top of page

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