Wall Street: Ripe for a rally?

With little on the economic docket and the Dow and S&P 500 at 12-year lows, stocks may be gearing up to surge but it may not last.

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By Alexandra Twin, CNNMoney.com senior writer


NEW YORK (CNNMoney.com) -- With little in the way of earnings or market-moving economic news on tap this week, stocks will continue to take a cue from the financial sector as investors try to see if the latest levels can hold.

There's been such a tremendous selloff in the financial sector and in some of the retailers, that at some point even traders who are betting on a weak market are going to want to get in, said Fred Dickson, chief market strategist at D.A. Davidson & Co.

And the mild reaction to a dismal jobs report last Friday could suggest that the time is nearing.

"How much lower can Citigroup go when it's down around a buck?," asked Dickson, adding, "We're starting to get to the point where the risk of a big upside in the market is greater than the risk of a bigger downside."

With the Dow and S&P 500 both down more than 50% off their October 2007 highs, a decent bounce is not hard to imagine, said Gary Hager, president of Integrated Wealth Management.

He said that the pent-up demand is equivalent to shoppers pressing against the door of a store that is about to open for a sale, but the shoppers wont' budge until the first few jump in. Once they start moving, the rest will follow.

Ripe for a bear market rally. In both October and November of 2008, the stock market stabilized at levels that many market pros were betting could be the bottom, before ultimately declining further. That could be the case now as well, Dickson said. But he also said that some of what he has been seeing lately is reminiscent of the way Wall Street ultimately stabilized during the last bear market, bottoming between October 2002 and March 2003.

Dickson noted that the number of New York Stock Exchange stocks making new lows has dropped dramatically with each so-called "bottom," in October, November and now. As such, that could indicate a stabilization.

Also, from a contrarian perspective, stocks are ripe for a bounce. The American Association of Individual Investors (AAII) said 70.3% of investors surveyed were bearish, as of Wednesday. That's the highest level since the index was created in 1987.

The bearish sentiment index has been hovering between 39 and 55 over the past two months, but then last week suddenly jumped to 70.3, said Cara Scatizzi, associate financial analyst at AAII.

In tune with the bearish tone, investors pulled billions out of equity mutual funds last week. According to the latest report from Trim Tabs, investors pulled $29.9 billion out of stocks in the week ended March 4, versus an outflow of $18 billion in the previous week.

The question is what might help soothe the market and even trigger a bear-market rally. So far, most of the government initiatives announced have failed to provide the spark, including the $787 billion stimulus plan, Treasury's "stress tests" for banks and President Obama's $3.6 trillion 2010 budget.

Dickson said that indications over the next month that Congress is going to chip away at some of the spending in the budget could help, while Hager said the suspension of the mark-to-market accounting rule would help.

On the docket

Tuesday: The January wholesale inventories report is due shortly after the market opens. Inventories are expected to have fallen 1% after dropping 1.4% in December.

In Washington, the Senate Energy Committee holds a hearing on offshore drilling. On Thursday, the same committee discusses transmission lines.

Wednesday: The government's weekly crude inventories report is due out at 10:30 a.m. ET, as well as the February Treasury budget at 2 p.m. ET.

In Washington, the congressional oversight panel is due to release a report on the oversight of the Troubled Asset Relief Program (TARP), a.k.a. the bank bailout plan.

Thursday: February retail sales are due before the start of trade from the Commerce Dept. Sales are expected to have fallen 0.4% after rising 1% in the previous month. Sales excluding volatile autos are expected to have fallen 0.2% after rising 0.9% in January.

The government's weekly jobless claims report is also due in the morning. 640,000 Americans are expected to have filed new claims for unemployment versus 639,000 in the previous week. Weekly claims hit a 26-year high of 667,000 in February. The number of Americans continuing to stay on unemployment is expected to remain near record levels of 5,112,000.

The January business inventories report is due for release after the start of trading. Inventories are expected to have fallen 1.1% after dropping 1.3% in the previous month.

In Washington, a House Financial Services sub-committee debates mark-to-market (MTM) accounting, a rule that critics say has exacerbated the credit crisis. MTM requires banks to report the value of their investments if they sold them now, even though some of those assets - like mortgage-backed securities - have tumbled dramatically.

Friday: The January trade balance, due before the start of trading, is expected to have widened to $38.2 billion from $39.9 billion in December.

Also due are reports on February import and export prices and the initial March consumer sentiment index from the University of Michigan. To top of page

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