The bulls are back in the driver's seat -- and just in time to pull over at a rest stop for a healthy dose of chin scratching and other types of introspection.
In the week after the
Federal Reserve's decision to
cut rates by another 50 basis points -- its fifth rate reduction this year -- there is no major economic data being released, only a smorgasbord of retail earnings and not much else flying.
In other words: "It's autopilot time. Even a correction would be autopilot. You've got a very rotational and periodic market," said Dan Ascani, president and director of research for
Global Market Strategists
. Ahead of the Memorial Day weekend, Ascani is looking for stocks to do very little except correct overbought sectors as investors rejigger portfolios. "We'll see some backing and filling here, but nothing significant."
Last week's Fed-cut-inspired rally sent the
Dow Jones Industrial Average soaring past 11,000 and back within striking distance of its all-time high of 11,723, hit in January 2000. "There's nothing really negative developing except that the market is overbought. I think we'll pull back, but we gotta work higher first," Ascani said.
Indeed, improved investor sentiment and a belief that the rate cuts will lead to an economic recovery have lifted stocks since early April. But as stock prices rise, so do valuations. Because earnings are likely to be flat in the near term, stocks appear to be getting expensive again. Currently, 19 of the 30
blue-chips that make up the Dow have
price-to-earnings ratios that are higher than their five-year average.
Over the past week, the Dow tacked on 4.4% in gains, with a nice late-day Friday rally to add to the heady boost of earlier in the week. The
S&P 500, which tracks the broad market, gained 3.7%. The tech-heavy
Nasdaq Composite Index rose 4.3%.
The Economic Front
While economic data has been critical in fueling investor sentiment lately, data this week will likely provide little impetus for the market to move one way or another because the latest rate cut will probably still be fresh in investors' minds. Trend watchers will have the
durable goods orders and get a second look at the
University of Michigan's
consumer sentiment index, which will be finalized for May. Both of those hit the market Friday, along with a preliminary reading of the
gross domestic product for the first quarter. The advance report of GDP, which is a preview of this week's report, showed that the economy grew 2% early in the year.
"We're calling for close to zero growth for the second and third quarters," said Elisabeth Stoegmueller, assistant economist for
Dresdner Kleinwort Benson
. This week, she'll be looking mostly at durable goods orders, which are a good gauge of the money poured into major expenditures like turbines and airplanes. She expects about a 3% decline in durable goods orders, which is lower than the consensus among economists for a 2.1% decline.
Thursday brings another weekly dose of
initial jobless claims. Stoegmueller said they will be on the rise this week, even though they fell during the past two weeks. The trend, she says, is toward increased job losses. "I think we could see 5% unemployment by the end of the summer," she said. The unemployment rate climbed to 4.5% in April.
"That's why the Fed is cutting so aggressively," she said. "With no inflation danger at this point, there's no reason for them to accept unemployment." Like others in the market, Stoegmueller expects the Fed to cut another 50 basis points when it meets in June.
has taken a look at the impact of the recent series of rate cuts on the
The Retail Report
Retailers will take the stage, with many small- and mid-cap companies releasing earnings throughout the week. Those reporting Tuesday include
, two department stores in the midst of major expansion projects. Target releases in the morning, Kohl's after the bell.
, a software maker whose primary ware is a networking operating system platform, and
, an Internet-focused software maker, also release earnings on Tuesday. Analysts expect Novell to make 3 cents a share, and they anticipate a 5-cent loss per share from Agile, according to earnings tracker
Thomson Financial/First Call
The rest of the week will be packed with smaller names and some interesting stories. The alterna-retailer
, which has been expanding like weeds into shopping malls during the past three years, releases its first-quarter results Wednesday. The stock has doubled since the beginning of the year. The company's sales grew from $168.9 million to $257.2 million last year. Analysts expect Hot Topic to make 14 cents a share, better than its year-ago result of 12 cents. See the roundup below for more details on the retailers.
EPS data courtesy of Baseline. Year-to-date figures accurate as of May 17 close.