The Coming Week: Tough Test

A deluge of reports, including consumer confidence, employment and third-quarter economic growth, will either stoke or stop the market's recent rally in the coming week.

"It's all about the economic data next week," says Peter Cardillo, chief market analyst at S.W. Bach. "And we expect strong enough numbers to keep the end-of-year rally in full force."

The major averages enter next week at their best levels in four and a half years, pushed up in part by speculation about holiday retail sales. Traders say they expect indications on sales activity over the weekend to be one of Monday's major market movers.

According to one trade group, the holiday season is shaping up quite nicely. The National Retail Federation recently raised its sales outlook for the season, based on economic indicators showing surprising vitality after a year marred by gloom. The private group hiked its sales forecast for November and December up a full percentage point to a gain of 6% over last year. Still, the figure would mark a slowdown from last year's pace of 6.7%.

The health of the housing sector, which has been considered the linchpin of the economic recovery, will be another focus when October existing home sales figures are released on Monday. The Thomson First Call estimate is for 7.2 million, down from 7.28 million the prior month. Nevertheless, Paul Mendelsohn, strategist at Windham Financial, advises investors against overreacting to the anticipated decline in sales.

"We are entering a traditionally slow period for new-home sales," says Mendelsohn. "Furthermore, we are still at historically high levels for housing sales. So a slight pullback is to be expected."

On Tuesday, durable goods orders for October will be released. Economists expect a rise of 1.5%, compared with the 2.4% drop in September.