In past years, the week before Christmas has generally been kind to stocks.
But for the historical trend to play out this year, analysts say, oil prices must remain steady and health care stocks need to stabilize after
recent nose dive.
A smattering of earnings and handful of economic reports are also likely to provide some direction in what is expected to be a quiet week of trade. The markets will be closed Friday for the Christmas holiday.
"Historically, the week before and after Christmas tend to have an upward bias," said Art Hogan, chief market analyst at Jefferies & Co. "In fact, if you go back over the last 45 years, that week is up 80% of the time."
Hogan said he expects the week to be defined by low volume, however, with activity slowing down sharply by Wednesday.
Last week, stocks rose, with the
up 1% and the
up 0.5%. At the same time, oil prices surged as forecasters called for below-normal temperatures across the country through the end of December. Nymex crude futures jumped more than $2 Friday to $46.28 a barrel.
"If oil goes back up to $50 a barrel, alarm bells will start to go off again," said Hogan.
Investors will also be paying close attention to developments in the drug sector. On Friday, Pfizer plunged 11%, weighing heavily on the Dow, after saying that its arthritis drug Celebrex posed "increased cardiovascular risk" when used in high doses. The Amex Pharmaceutical Index shed 3%.
Peter Cardillo, chief market strategist at S.W. Bach, doesn't expect another sharp selloff in the sector next week. In fact, he said investors could be tempted to do some bargain-hunting, helping to drive stocks higher.
"I think the market can continue to inch up," he said. "But it's obviously going to be a rather slow week."
One of the most significant economic releases in the week ahead will no doubt be the Conference Board's leading economic indicators on Monday. The LEI has fallen for five straight months, signaling that economic growth could decelerate in the near future. The index probably climbed 0.2% in November, but another decline could fuel fears of a more protracted slowdown.
On Wednesday, a final revision to third-quarter gross domestic product is on tap. Economists expect GDP to remain unchanged from a preliminary estimate of 3.9%.
With the markets closed Friday, a flurry of data will be released on Thursday, including personal income and spending for November, durable-goods orders, new-home sales and the University of Michigan's consumer sentiment survey for December.
Durable-goods orders are expected to rise 0.5% after falling 0.4% in October. Income and spending probably grew at a slower pace of 0.3% and 0.2%, respectively, while new-home sales and consumer confidence likely fell from prior readings.
Among companies reporting earnings next week are
Analysts expect Morgan Stanley to earn $1.01 a share, while Bear is projected to earn $2.14 a share in the fiscal fourth quarter. Still, other brokers have beaten estimates by wide margins recently, suggesting bigger numbers could be in store.
posted earnings of $1.96, well above the $1.69 estimate, and
earned $2.36 a share, above the $2.32 estimate. Bear and Morgan are due to report on Tuesday.
In recent weeks, profit estimates for the fourth quarter have been coming down. Analysts are now looking for 15% growth compared with 15.5% at the start of October. The consumer discretionary sector has gone through the greatest downward adjustment to 8% from 15%. Financials and technology have been cut by 3 percentage points, to 10% and 13% respectively. Only energy, telecom and utilities are seeing upward revisions.
While analysts have historically lowered their earnings estimates through the course of a quarter, investors have grown accustomed to profit estimates being revised up in recent quarters. For the year, earnings are expected to climb 19.1%.