Investors are dubious that Wall Street's best week since November means the stock market has found a bottom.
Even though the Dow industrials advanced 9 percent for the week and the S&P 500 shot up over 10 percent from the close on March 6, investors still fear the same problems.
After the credit crisis shredded the financial system and markets worldwide, many still question the health of banks and believe the economy will stay weak through 2009.
Obviously, for a massive widespread rally, you are going to need more people comfortable and I don't think that happens until a plan is produced to address the banking issues, said Peter Jankovskis, director of research at OakBrook Investments LLC in Lisle, Illinois.
I really don't think you're going to see a true floor in this market until we get a comprehensive plan on the finance sector.
Since January, it has largely been a case of one step forward, two steps back for markets, with rallies promptly being reversed as markets push lower. Stocks racked up their best week since November on Friday with a four-day winning streak, and while investors note that this is a positive sign, it does not necessarily mean the worst is over.
Banks led the advances as executives from Citigroup
Financials will continue to set the market's direction as investors await the results of government stress tests to determine banks' health, as well as additional details on the Treasury Department's plan to shore up the sector.
I find it encouraging that people were willing to step into the market on the fundamental news that came out from Citigroup and Bank of America. It's a sign that at least a few people out there are comfortable enough that the problems will be resolved, Jankovskis said.
FED DECISION AND CPI AHEAD
In the week ahead, investors will watch for any new methods the Federal Open Market Committee may use to bolster the weak economy.
With the fed funds rate target already near zero, analysts are expecting the Fed will hold rates steady at the end of the two-day meeting on Wednesday. Both analysts and investors will be looking for signs of any other measures the Fed might take to loosen credit markets, such as buying up long-term U.S. Treasuries.
A fresh round of data on inflation, manufacturing, housing and the labor market is expected to show a gloomy picture of the economy. On Monday, the Federal Reserve will release February readings on industrial output and capacity utilization. On Tuesday, the U.S. Producer Price Index and housing starts, both for February, are due.
On Wednesday, the U.S. Consumer Price Index for February will be released. Economists polled by Reuters expect that overall CPI rose 0.3 percent in February, matching January's gain. Core CPI, excluding volatile food and energy prices, is forecast to have edged up only 0.1 percent in February, compared with a 0.2 percent gain in January.
TOO FAR TOO FAST?
For the week, the benchmark S&P 500 shot up 10.7 percent, making it the index's third best week since World War II. The Dow jumped 9.01 percent, and the Nasdaq added 10.6 percent.
Market watchers worry that the ramp-up could turn out to be too much, too fast as stocks' ability to accumulate gains over time to build a solid base is considered a key characteristic of a meaningful rally.
Even with the week's substantial gains, the Dow Jones industrial average <.DJI> is down about 18 percent for the year so far. The Nasdaq composite index <.IXIC> is down about 9 percent for 2009, while the Standard & Poor's 500 <.SPX> is off about 16 percent.
From its all-time high hit in October 2007, the S&P 500 has lost about 52 percent.
A lot of investors understand that if they catch the bottom, the upside can be enormous. Rallies at this point may start to be really, really sharp. But people are nervous, so there is ample opportunity for sellers, said Charles Lieberman, chief investment officer of Advisors Capital Management LLC, in Paramus, New Jersey.
Pundits are also wary of calling a low for the bear market in the midst of a situation that remains overwhelmingly negative: dismal economic data, accelerating job losses, tight credit markets and uncertainty over what steps U.S. officials can take to rescue the economy.
RULE CHANGES MAY SPUR A RALLY
Investors will also be looking for more comments next week from regulators on mark-to-market accounting and the uptick rule.
Some on Wall Street have called for the accounting rule, which requires assets to be valued at current market prices, to be suspended or modified as it would destroy banks' balance sheets by forcing them to write their assets down to fire-sale prices.
The top U.S. accounting rulemaker, the U.S. Financial Accounting Standards Board, will discuss mark-to-market guidance at its board meeting on Monday, according to its website.
A modification of the mark-to-market accounting rule could drive a rally in banks' stocks, which have been hammered by worries over the deteriorating prices of their assets.
The possibility of reinstating the uptick rule, designed to slow the pace of short selling, will also be on the radar after Rep. Barney Frank said he is hopeful the Securities and Exchange Commission will bring back the rule within a month.
The rule, which allowed a stock to be sold short only when the last sale price was higher than the previous one, was repealed by the SEC in 2007 because the agency found that changes in trading strategies made it ineffective. Frank's comments on Tuesday helped extend the market's rally.
(Additional reporting by Ellis Mnyandu and Deepa Seetharaman; Editing by Jan Paschal)
(Wall St Week Ahead runs every Friday. Questions or comments on this column can be e-mailed to: leah.schnurr(at)thomsonreuters.com)