After milestone, Wall Street ponders if rally can run more

After a historic week for Wall Street that lifted the main blue-chip index above 10,000, investors are mulling whether the stock market rally is now over or just getting started.

The rise of the Dow Jones Industrial Average above 10,000 sparked a spate of celebrations, but also provoked some skepticism about whether the market has gotten ahead of the economy and corporate earnings.
The market had already begun a pullback with a selloff Friday, and the direction may be determined by the raft of corporate earnings in the coming week and economic reports, notably in housing.
In the week to Friday, the blue-chip Dow climbed 1.33 percent to end at 9,995.91 as it failed to hold above the key level of 10,000.
The Standard & Poor's 500 broad-market index advanced 1.51 percent to 1,087.68 and the tech-heavy Nasdaq composite added 0.82 percent on the week to 2,156.80.
Gains over the past week were inspired by better-than-expected earnings from key firms including JPMorgan Chase, Goldman Sachs and Google, among others.
But the mood was dampened by disappointing results later in the week from Bank of America and General Electric.
Fred Dickson, chief market strategist at DA Davidson & Co., said the 10,000 level on the Dow is "a signpost on the investment highway marking a significant distance recently covered, but not offering any clues about the market's speed limit or upcoming opportunities or obstacles."
"A milestone such as 10,000 may trigger some pre-programmed selling, but on the other hand it should provide a renewed sense of confidence that the six month market rally is real and that investors should see continuing incremental improvement in the prospects of the US economy," he added.
Some say the recovery of the Dow to the levels of just after the collapse of Lehman Brothers last year -- but still well below 2007 records -- is a sign that the economy is returning to normal.
"The speed of recovery in both global asset prices and the global economy has far surpassed even the most optimistic forecasts prevailing in the spring  of this year," said Andrew Spence at TD Securities.
"Looking out over the next six months, the issue is whether private sector demand can pick up the slack as policy stimulus peaks -- and here there is a significant risk that current and high growth expectations will be disappointed," he added.
Bill George, a professor of management practice at Harvard Business School, said the 10,000 level is nothing to get excited about.
"This purported milestone isn't a victory. It's nonsense," he said.
"We are far from out of the woods. Large companies are still laying off employees. When we cross the 10 percent unemployment line, consumer spending may contract even further."
But Julian Callow at Barclays Capital said economic and corporate reports have been getting better, suggesting better momentum in the US and other major economies.
"Part of the reason to pay close attention to earnings is that profitability tends to lead investment," he said.
"This suggests that the anticipated strong recovery in operating profits (helped by strong productivity data from the US) ought to drive investment higher."
In the coming week, investors will focus on earnings from top firms like Apple, Microsoft and Yahoo in the tech sector, Wells Fargo in banking and Boeing in the industrial sector.
"Our sensitivity to earnings is very high," said Gina Martin at Wells Fargo Securities. "How the market interprets the earnings announcement over the next couple of weeks will determine the direction that we trade."
Also on tap in the week are reports on US housing starts and existing home sales.
Bonds ended lower for the week.
The yield on the 10-year Treasury bond increased to 3.417 percent from 3.384 percent a week earlier and that on the 30-year bond edged up to 4.247 percent from 4.227 percent. Bond yields and prices move in opposite directions.

Source: AFP

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