Can the stock market rally keep going?

August 17, 2014: 9:18 AM ET
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NEW YORK (CNNMoney)

Are the good times rolling or is Armageddon near in the stock market?

Even in normal times, market predictions are polarizing, but these days, it's especially hard to make sense of all the noise coming out of Wall Street.

The market itself isn't making things easier. After hitting a record high in July, the Dow Jones Industrial Average turned negative earlier this month only to rebound into positive territory last week.

Here's a look at the good, the bad, and the unknown.

The case to sell stocks: The pessimistic view is convincing if you look at world news. Russia and the West continue to squabble over Ukraine, Israel and Hamas don't have a permanent ceasefire, and the United States is conducting airstrikes in Iraq in an effort to beat back ISIS militants who have already taken over wide swaths of the country and are now being called an alternative to al Qaeda.

"We think this is a situation fraught with danger and risk," wrote Cumberland Advisors' David Kotok in a research note about the Iraq violence. "We are maintaining our cash reserve."

Plenty of investors agree. The yield on 10-year U.S. Treasury bonds fell to its lowest level on Friday -- touching 2.33%. When yields fall, bond prices rise. It's usually a sign that investors are fleeing into the perceived safety of bonds.

ISIS selling oil on the black market

Then there's a more basic question of whether the bull market has gotten ahead of itself. We are about five and a half years into the rally. Stocks are no longer considered cheap, and many strategists say it's time for a correction, which is technically a market drop of 10% or more.

Related: Is it time for Wall Street to issue a correction?

The S&P 500 is trading at 15.3 times twelve month forward earnings, compared with historical average of around 13.5, according to data from FactSet.

The case to buy stocks: Optimists say the bull has more room to run.

Their reasoning: The U.S. economy is looking mighty fine. Hiring has picked up, with employers adding over 200,000 jobs a month for six straight months, and the economy grew at a 4% annual pace in the second quarter, effectively snapping it out of its deep winter freeze from the start of the year.

"Bull markets typically end when a recession is in the offing, which doesn't appear to be the case currently," claimed analysts at Charles Schwab in a report Friday.

Corporate profits are also strong. Of the 469 companies that have reported second quarter earnings so far, more than 73% have reported profits that beat Wall Street expectations, a FactSet analysis shows. It's one of the better recent quarters.

Related: Companies that treat workers well have better stock returns

"Investors have voted with their cash and have picked the United States as the global safe haven, " said Scott Wren, Senior Equity Strategist at Wells Fargo Advisors, in a recent note. "We do not look for that attitude to change anytime soon."

The week ahead: Trading volume is typically muted this time of year as many investors enjoy the last few weeks of summer, but that doesn't mean things won't get interesting.

The Federal Reserve and other central bankers from around the world will descend on Jackson Hole, Wyoming late in the week for their annual gathering on economic policy. Federal Reserve Chief Janet Yellen will deliver remarks on the labor market on Friday. As usual, investors will be keyed for any clues as to when the Fed plans to raise interest rates.

European Central Bank President Mario Draghi will also speak Friday. Investors will be listening closely for hints as to whether the central banker is planning any stimulus program to combat Europe's persistently slow growth and feeble inflation.

Related: Putin factor snuffs out European growth

Strategists at Capital Economics commented Friday that although they don't expect direct insights into central bank actions at Jackson Hole, remarks from Fed officials about the jobs market could have indirect implications on monetary policy. As the economy improves, the Fed is more likely to raise interest rates, perhaps even sooner than expected.

Earnings also have the potential to move the market this week.

Some big bellwether names, including Home Depot (HD), Staples (SPLS) and Hewlett Packard (HPQ, Tech30), all report quarterly results.

Markets
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Index Last Change % Change
Dow 17,804.80 26.65 0.15%
Nasdaq 4,765.38 16.98 0.36%
S&P 500 2,070.65 9.42 0.46%
Treasuries 2.18 -0.03 -1.27%
Data as of 12:56am ET
Company Price Change % Change
Bank of America Corp... 17.62 0.09 0.51%
Apple Inc 111.78 -0.87 -0.77%
General Electric Co 25.62 0.48 1.91%
Intel Corp 36.37 -0.65 -1.76%
Microsoft Corp 47.66 0.14 0.29%
Data as of Dec 19