The Coming Week: Market Will Savor Its Rally, but International Data Loom

The major economic data will come from Germany and Japan next week, and they could monkey with Wall Street's new complacency.
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After

Friday's big rally, inspired by that weak August

jobs report

, what's the market going to do for an encore? Well yeah, it'll take Monday off to eat lobster and get hammered at the beach, but after that?

Friday's action was just the latest feat for the amazing, death-defying U.S. stock market. Just as it looked like major indices were racing to complete one of those oh-so-scary head-and-shoulders patterns, just as evidence was mounting that the

Federal Open Market Committee

would again be hiking rates at its Oct. 5 meeting, just as all those worries about capital fleeing the U.S. seemed like they'd come true, in slipped the jobs report. Sometimes it almost seems like the market's rigged.

Let's consider this year compared with last year. On Sept. 3, 1998, the

S&P 500

finished at 982 -- it closed 38% higher on Friday. The 30-year Treasury yield is 80 basis points, or 15%, higher. Even with some pretty amazing earnings in the third quarter -- it looks like they'll gain better than 20%, year over year -- things are way more highly valued than they were then. And even back then one could have argued things were rather stretched.

'Why Can't We Break This Thing?'

"Why, if it is manifestly overvalued, can't we break this thing?" asked Howard Simons, quantitative strategist at

Fimat Futures

. "I think people have just gotten tired of being wrong and they've just said the hell with it." Too many times it has been a mistake to have gone short. It has been a mistake to have gone into cash. It has been a mistake to be bearish.

"Fundamentally, I do not like the market," said Simons. "Technically, I think the risk of a break is high. The market doesn't belong higher, but don't be surprised if we run up again."

Simons' sense is that if the market gets the idea that the

Fed

is on hold from here on out, and that its talk of the danger of high equity prices is more bark than bite, stocks could be in for a rocket ride. He notes that the recent period of uncertainty is similar to what the market went through in the spring and, as was the case then, there's been a lot of call selling. With stocks moving higher, and futures and options expiring the Friday after next, there could be a race to cover. "The comedians have been selling calls since last month," said Simons. "As we get toward expiration, we could have an unwinding to the upside that could be fierce."

That depends on stocks continuing to post gains, though, and whether

that

keeps on happening really depends on the Fed. Although in the wake of the August employment news, the market's perception is that the bank is on hold for the rest of the year, that is not necessarily the case, points out

Morgan Stanley Dean Witter

chief money-market economist Bill Sullivan.

"If you pay close attention to the Fed, first, they perceive the current condition in the labor markets as tight, and I don't think that broad interpretation will change in light of the latest data," said Sullivan. "Second, they're still looking at the trajectory of consumption and the interplay of consumption and equity wealth."

Look Overseas for the Big Numbers

There is little in the way of U.S. economic data to hinder the perception of the Fed staying pat in the coming week. The only really major report to come out, the August

Producer Price Index

, is not expected to offer much fodder to the tightening argument. There will be, however, a bevy of Fed officials giving speeches, and

Big Al Greenspan

himself will take to the stage on Wednesday.

Yet the most important economic news will likely come from overseas. Germany reports its July

industrial production

data Wednesday, and it is widely expected to be the first of a series of reports that will show a flourishing European economy. That's important in these days when

people are talking about a rebalancing of world economic growth, and a subsequent movement of funds away from U.S. shores.

Even more weighty: Japan's

gross domestic product

figures for the April-June period.

Expectations are that that number will come in flat. If it comes in strong, it could pose problems for the U.S. markets. Japan's previous GDP release hurt the bond market badly -- its unexpected strength took away the argument that rates would stay on hold because the world economy was at risk. This GDP report will be more of a currency story -- everybody knows, after all, the world economy's on the rebound. If the bond market moves on it, it'll be because the dollar has.