MARKET SNAPSHOT: Stocks Turn To Data To Fuel Further Gains

By Nick Godt

Investors next week will seek out more signs that the global recession is in its last throes after a string of better-than-expected economic reports helped stocks put in a strong performance over the past five sessions.

"Unlike last week, when retail sales and consumer confidence numbers weighed on the market, the majority of the data this week was on the positive side and helped us," said Michael Sheldon, market strategist at RDM Financial.

Helped by much better-than-expected existing home sales in July , stocks rallied to fresh highs for the year on Friday. The Dow Jones Industrial Average (DJI) rose 155.91 points, or 1.7%, to finish at 9505.96, its highest level since November. The S&P 500 index (SPX) gained 18.76 points, or 1.9%, to 1,026.13, and the Nasdaq Composite (RIXF) advanced 31.68 points, or 1.6%, to 2,020.90.

For the week, the Dow industrials rose 1.9%, the S&P 500 gained 2.2%, and the Nasdaq was up 1.8%.

That contrasted with last week, when stocks tanked after a survey by the University of Michigan showed an unexpected drop in consumer sentiment in August, the second monthly fall in a row. Adding to the gloom, retail sales also unexpectedly fell in July.

"Consumer-related economic data has been fairly weak, reflecting rising unemployment and home prices that have continued to decline," Sheldon said. "But manufacturing and production are rising and that's likely to continue over the next six months."

Next week will bring more clues on home prices, with the S&P/Case-Shiller home price index due out on Tuesday, along with the Conference Board's gauge of consumer confidence in August.

Over the past week, clothing retailers such as Gap Inc. and Aeropostale Inc. (ARO), did post better-than-expected earnings on average, but "as we've seen throughout the reporting season, however, the upside was entirely the result of cost cutting," said BMO Capital Markets analyst Robert Kavcic.

Wednesday, reports on July durable goods orders, a barometer of consumer, business and government spending on big-ticket items, will be released, along with new home sales data for July.

Thursday will bring jobless claims and the second estimate of second-quarter gross domestic product. On Friday, personal income for July will be released, along with the final reading of August consumer sentiment by the University of Michigan.

No more cash for clunkers

Monday will also see the end of the government's popular "cash for clunkers" program, which provided cash incentives for consumers to turn in old gas-guzzlers against new fuel-efficient vehicles.

Absent of consumer spending, government measures to boost the economy have helped the U.S. avoid a depression and some level of growth is expected to return in the second half of the year.

"The million dollar question is whether this can eventually create a positive feedback loop of higher employment, consumer spending, and sustainable growth," Sheldon said. "But that's a question for 2010 that nobody can answer just yet."

China, oil and the dollar

Along with stocks, crude-oil futures also touched new highs for the year above $74 a barrel.

The move was in part fueled by weakness in the dollar, which has played a safe-haven role this year, and has tended to have an inverse correlation with both stocks and commodities.

Beyond commodities sectors of the S&P 500 such as energy and materials, a weaker dollar has also benefited export-oriented stocks in the industrials sector, according to Sheldon.

Chinese economic growth has also helped fuel the surge in commodities, but worries about the sustainability of its lending sector, and about this year's stock market gains have caused minor tremors in global markets over the past several weeks.

"This week's volatility in the Chinese stock market has turned heads around the equity world, and rightfully so," said BMO's Kavcic.

However, he noted that while markets in Canada and other commodities-sensitive countries were more closely correlated to China, the U.S. market continues to remain more pre-occupied with domestic economic results and earnings.

According to RDM's Sheldon, however, Chinese-related tremors could be one of several factors that might derail the U.S. rally in stocks, which many strategists fear might be overstretched.

The S&P 500 index has now rallied 54% since hitting lows back in March and the 4% advance it saw in August has come amid very low trading volumes.