Wall Street may have momentum on its side next week as the S&P 500 tries to puncture the 1,000 level, but the rally's staying power will depend on whether U.S. data and corporate earnings provide more signs of economic stabilization.
In a busy week of data, the most crucial report will be a look at the number of jobs lost in July as measured by the Labor Department's non-farm payrolls report.
While unemployment is expected to remain high even as the economy begins to recover, analysts are anticipating the data will show the economy shed fewer jobs than the month before.
Among companies expected to release results are Dow components Procter & Gamble
The broad Standard & Poor's 500 index <.SPX> recorded its best five-month streak since 1938 on Friday with July's gains as more corporate earnings beat expectations and data suggested the worst of the economic slump was over.
More companies will release their quarterly scorecards, though the bulk of the earnings season is out of the way with 67 percent of S&P companies having reported. The better-than-expected results have driven the most recent leg of the rally.
But with a 46 percent gain from March's 12-year low, the S&P 500 could be ripe for a pullback, especially if the week's data is less encouraging.
I still sense from the portfolio managers and traders we deal with that even though we have nice upside momentum, they have their fingers on the trigger and aren't going to stick around if some bad data comes out, said Brian Daley, sales trader at Conifer Securities in New York.
Investors will be watching the S&P to see if it can breach 1,000, a key technical and psychological mark. The market will face resistance getting to that point, but piercing 1,000 could also be perceived as a buy signal, causing the market to rally even higher.
The market tested the level earlier in the week, coming within about 4 points but was unable to get any further.
The price movements have been dramatic and impressive, said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California.
The volume has not been as impressive. I think that we're going to have to see better data in the weeks ahead to actually support it.
So far, 74 percent of S&P companies that have reported have beaten Wall Street's expectations, according to data from Thomson Reuters. Analysts point out that the expectations were a low hurdle to jump, questioning the strength of results that have come on the back of cost cutting and layoffs.
But results have surpassed expectations and heartened investors looking for further proof that the worst of the recession has abated. Since Alcoa kicked off earnings season on July 8, the S&P has surged 12 percent in the second leg of a rally that began in March but stalled through May and June.
The Street expected some slightly better-than-expected earnings, but this has been extreme so far, said Scott Wren, senior equity strategist at Wells Fargo Advisors in St. Louis.
The latest run-up saw the S&P 500 close out July with a gain of 7.4 percent. The Dow finished the month up 8.6 percent, its best gain for July since 1989.
SIGNS OF CONSUMER SPENDING
P&G, the maker of Gillette razors and Tide laundry detergent, will be of particular interest to investors looking for signs of life in consumer spending. P&G has already seen some of its brands lose market share as recession-weary shoppers trade down to cheaper brands.
In the same vein, a report on personal income for June will be watched for what it says about the savings rate. Personal income is forecast to fall by 1 percent, according to Reuters data, compared to a gain of 1.4 percent in May.
The May report also saw the savings rate jump to its highest level since records began in 1959. Consumer spending accounts for about two-thirds of the U.S. economy and will need to regain strength for any economic recovery to be sustainable.
The economy is expected to eliminate 320,000 non-farm payroll jobs in July, a hefty loss but still an improvement over last month's drop of 467,000. The unemployment rate is expected to rise to 9.6 percent. The data will be released on Friday.
Clearly the economic news has been getting less bad, said Wren.
I would argue the market has been expecting that since these March lows, and we keep getting confirmation that the economy is bottoming out.
Reports on private sector employment and weekly initial jobless claims to be released on Wednesday and Thursday, respectively, will be watched for any signs about what they might project about Friday's jobs reported.
Other data for the week include manufacturing and non-manufacturing ISM for July, factory orders for June and pending home sales for June.
(Additional reporting by Rachel Chang; Editing by Kenneth Barry)