The Coming Week: Rally Could Take a Holiday

The rising market may take a breather this Thanksgiving week if investors sit on the sidelines.
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The stock market is apt to be a flightless bird this Thanksgiving. After eight weeks of steady gains, strategists say it'll take another helping of good news to move the market higher in the coming week.

"This week provided some major evidence and surprises on the upside," said Lynn Reaser, chief economist and senior market strategist at Banc of America Capital Management. "But the market will need some additional drivers for gains, and one should not expect those surprises to continue week after week," she said.

Among the surprises last week was the Northern Alliance's headway in Afghanistan, where it took key cities faster than most observers had expected. The October

retail sales number also showed surprising strength, even factoring out the red-hot auto sector, and

weekly jobless claims posted a significantly smaller number of new claims than expected for a second-straight week. Low oil prices also tumbled further after OPEC saw its plan to cut production get tangled up. Cheaper gas at the pump pads consumers' pockets and helps to keep inflation down, allowing the

Fed to maintain low interest rates.

That's a lot of good news, but it may not be enough to keep investors buying. Bond yields have risen in the past 10 days, making equities less attractive relative to treasuries, says Thomas Van Leuven, market strategist at J.P. Morgan Chase.

Tryptophan

And a lot of investors will probably remain on the sidelines during the holiday week. "Especially with no compelling economic news and light volume, there will probably be a reluctance to make big bets before the long weekend. People will be looking to protect their gains," says Reaser. The market is closed Thursday, and much of Wall Street will probably take Wednesday and Friday off.

The positive economic data out over the past week are far from conclusive, anyway. Economists say they need to see a couple more weeks of positive data to establish whether the outlook is actually improving. "We've had four to five pieces of information telling us the story of an economy that's a little more resilient than people had assumed. Maybe the fourth quarter won't be as abysmal as people thought," said Anthony Karydakis, senior financial economist at Banc One Capital Markets. "But that's a first tentative conclusion. You can't go too far."

Economists will be watching the University of Michigan

consumer sentiment index, to be released Wednesday, to determine if a strong earlier reading was for real. Weekly jobless claims have also become important as economists hunt for trends in the postattack economy.

Housing starts data out Monday are unlikely to affect the market, says Karydakis.

A Familiar Tune?

In the meantime, the dimensions of the past eight weeks' rally are approaching those of the stunning April-May rally earlier this year. The

Dow Jones Industrial Average is up 19.8% since Sept. 21, compared with 20.7% during the spring rally. The

Nasdaq Composite Index has surged 33%, vs. 41% in April-May, and the

S&P 500 has gained 17.9%, compared with 19% in the previous rally.

"We think that there's not a whole lot different about the recent run-up and the two run-ups earlier this year," said Van Leuven. Stocks rallied sharply during the earnings reporting months of January and April this year, only to fall to new lows afterward. "Over the next several weeks, a good part of the recent rally is likely to be given back," he said. "We think there's a very good chance we haven't made the lows." The index closed Friday at 1,138.65.

On the other hand, six months later, things are, at least, a little different, says Charlie Reinhard, senior strategist at Lehman Brothers. At 2%, the

fed funds rate is now below core consumer price inflation of 2.6%, something Reinhard says has never failed to pull the economy out of recession. Companies have also had more time to pare down inventories, and energy prices have plummeted. And while analysts are still lowering their earnings estimates, the pace has slowed.

Reinhard says he's avoiding energy and utility stocks because of falling energy prices, as well as consumer staples and health care, which are too richly valued compared with the rest of the market on a historical basis. He likes technology because he expects capital spending to come back as soon as earnings rebound. "It's still cheaper to invest in technology than in labor," he says.

Wall Street will have to wait another six months to get the final answer.