The Coming Week: Market Feeling No Pain After Shots of Good Economic News

The old thinking that sneaked back into the market these last few weeks has some staying power. Other rallies of this type in the last eight months had been tossed onto the curb after only two shots of tequila.

This rally has a stronger stomach, many market watchers say. Investors are beginning to shift from simply hoping that the gains witnessed in equities aren't compacted within the span of a couple of hours to thinking about maintaining rallies. They're also starting to react positively to positive economic data.

"Psychology is turning: We're trading at a level where we can hold on to positions for a longer time without a blowup," said Sam Ginzburg, director of equity trading at Gruntal.

The bullishness isn't overwhelming anybody, but pessimism has been beaten back. Whether the rallies advance is grounded in theoretical stuff such as valuations and more base concerns, such as Friday's employment report.

The market really hasn't entered into that sorting-out process of naming winners and losers yet. That's mostly because fundamentals stink: The earnings outlook is poor, labor costs are rising, profits are pathetic and nobody really has much of a clue about what's going to happen next.

The improving outlook is based mostly on economic data, which the market gets a nice dose of in the coming week, beginning with an important gauge of the manufacturing sector. The National Association of Purchasing Management's Purchasing Managers' Index, a measure of manufacturing conditions around the country, will be released Tuesday. It's expected that it improved in April to 43.4 from 43.1, which still indicates contraction in the manufacturing economy.

The Big Three automakers are expected to report April sales next week, and despite the ascendancy of technology and other industries in America, what's good for Ford (F Quote), General Motors (GM Quote) and DaimlerChrysler (DCX Quote) is good for manufacturing industries.

But all of this is a warm-up. The April jobs report will come out Friday, and there are basically two ways this thing can go: It can come out in line with consensus (or weaker), signaling continuing weakness in the labor market. The consensus estimate right now is for a 22,000 increase in nonfarm payrolls and for the unemployment rate to rise to 4.4% from 4.3%.

There are several reasons to think this could come out weak. Initial jobless claims are at their highest level since 1996; the Help-Wanted Index, which tracks newspaper advertising, is at an eight-year low; and consumer confidence has been falling, reflecting concern that jobs are harder to get.

The Federal Reserve has been actively trying to arrest a potential breach in confidence that causes consumers to forgo spending. So far, it hasn't happened, judging by the 11.9% rise in consumer durable goods spending in the first quarter, although the strongest month was January.

The market might interpret a lousy report positively, figuring it would force the Fed to cut rates aggressively again. But with the Fed most likely to do so May 15, that's not much of a basis for a rally. Besides, this week, the market started to like strong economic data again.

A strong report pretty much seals the recession talk for a good while. Companies had been reluctant to lay off workers for some time because of the difficulty in attracting and retaining them. But they started cutting jobs as corporate profits worsened in recent months, and the Fed's rate cuts were meant to provide enough reassurance in a recovery to affect CEOs' decision-making.

Disrespecting the Bing

Until the economic data can be sufficiently parsed, however, the market might spend some time combing through some of these individual rallies. Strategists believe technical levels are going to be tested to see whether there's enough established demand at the current levels on the S&P 500 and the Nasdaq Composite Index to warrant further rallies.

The S&P 500 closed Friday at 1253, not far from where it stopped out on April 18, when the Federal Reserve surprised the market with a 50-basis-point interest-rate cut. The Philadelphia Stock Exchange Semiconductor Index is currently trading over the key level of 600; whether it can remain there depends on how well it can withstand whatever selling pressure reaches into the market next week.

Not every stock and every sector deserves a 25% gain in the span of three weeks.

"We're in a sorting-out process," said Richard Cripps, chief market strategist at Legg Mason in Charm City (Baltimore, for the non-Homicide fans). "Stocks seemed to have bottomed, but there aren't enough earnings to get investors excited."

The factors that motivate sellers, besides the opportunity to take profits or to build on a short position, are limited next week, however. There's still a fair amount of bearish sentiment in the market -- but earnings are winding down and next week doesn't offer much excitement on that front.

With the exception of PC maker Hewlett-Packard (HWP Quote), due out Monday, the biggest names on the dole are Emerson Electric (EMR Quote), Cigna (CI Quote) and some consumer products companies, like Newell Rubbermaid(NWL Quote).

As long as earnings aren't terrible, people seem to be able to feel all right.