Believe it or not, the Dow Jones Industrial Average has rallied nearly 19% from its March 9 low. On Thursday, the index surpassed a 20% increase from that day, putting it in bull market mode. Still, not every market observer is convinced by the move, saying the coming week could expose the market's weaknesses once again. Profit-taking forced the Dow to give back nearly 2% during Friday's session. The day before, the blue-chip average closed at 7924.56, good for a 21% advance from the 12-year closing low of 6547.05 set on March 9. According to Dow Jones' public relations department, "technically, this would be considered a bull market." Paul Mendelsohn, chief investment officer with Windham Financial, isn't buying it. "We're in a bear market rally," Mendelsohn said. "I don't believe that the old standard of a bull or bear market measured by 20% moves works in this kind of environment. You're going to have rallies in a bear market. The only question is how far higher we'll go." Depending on who you ask, Mendelsohn is right in questioning whether a 20% move really is a true indicator of whether the stock market is in bull or bear mode, especially considering the Dow is down more than 40% from the October 2007 highs. James Paulsen, chief investment strategist with Wells Capital Management, agrees that a bull or bear market can no longer be defined by specific percentage moves. However, Paulsen does acknowledge that there are many positive signs that a bottom for stocks has been established.
Those include higher volume on winning sessions, fewer stocks setting new 52-week lows, and the fact that leadership since November has been in many economically sensitive areas, including tech and retail. "I think we've had a fairly impressive show of a bottom on Wall Street, in not just stocks but in the commodities and bond market," he said. "The low's been tested and retested as the worst news in a long time has been thrown around. And despite everything, we've been unable to knock these three markets lower for any sustained period." There's plenty to be wary of over the next five sessions. For one, Tuesday will mark the end of the quarter, and market watchers worry that window-dressing could lead to increased volatility in the second half of the week. Additionally, the end of March means that the next major wave of earnings reports are not far behind. "You're still in the midst of some portfolio dressing," said Paulsen. "Some guys may want to show that they own certain sectors, even if they don't really want to own them. But they could unwind those positions after March 31. That could factor into next week's movement." Perhaps the biggest catalyst for the market will come Thursday, when the Financial Accounting Standards Board has a meeting scheduled to discuss two proposals that would alter the FASB statement 157 on fair value, or mark-to-market, accounting rules. Many financial institutions have long complained about statement 157, which was implemented in 2007 to change the definition of fair value -- the measure of the worth of an asset on a company's books -- and the methods used to measure fair value.
The mark-to-market rules have led to assets being priced well below their real valuation, making it impossible for banks to purge the toxic assets from their books at anything but fire-sale prices. Others argue that mark-to-market rules have certain advantages, such as accurately revealing the extent of problem assets and deteriorating financial condition of institutions. The two proposals the FASB will consider relate to how financial companies like Citigroup ( C) and Bank of America ( BAC) are required to take writedowns on impaired assets, and how companies can determine whether a market is not active and a transaction is not distressed. Mendelsohn says that a definitive decision by FASB on mark-to-market rules is "the most critical component of everything going on. The anticipation of a change has triggered a lot of this rally." "This could be big," Paulsen says. "If they come out with a significant alteration or relaxation of the rules, then you could have a radically different earnings reporting season." Yes, thanks to the quickness with which FASB has moved, any changes to the mark-to-market rules would apply to first-quarter earnings for companies. "If that happens, it's possible a lot of these banks' earnings could be better than we anticipate," Mendelsohn said. "If they're better for the first quarter, it could make a tremendous difference for the market." The economic calendar is packed with data over the next five sessions. After a quiet Monday, traders will contend Tuesday with the Conference Board's latest read on its consumer confidence index and the Standard & Poor's/Case-Shiller January report on home prices.
On Wednesday, the first report of the day will come at 8:15 a.m. EDT when the ADP employment report will be released. As the precursor to Friday's nonfarm payrolls report, analysts expect the ADP report to show a decline of 648,000 jobs. Later Wednesday, the Institute for Supply Management will release its manufacturing index for March, the Commerce Department will post February data on construction spending, and the National Association of Realtors will release pending home sales data for February. The major automakers are set to report U.S. auto sales for March on Wednesday, including General Motors ( GM), Ford ( F) and Chrysler. Meanwhile, Thursday will bring the Labor Department's weekly jobless claims report, as well as the Commerce Department's report on factory orders for February. Then on Friday, the Labor Department will issue its employment report for March at 8:30 a.m. EDT. Economists are currently forecasting that the U.S. economy lost 657,000 jobs as the unemployment rate climbed to 8.5% from 8.1%. "Three of the five days will revolve around jobs data, starting Wednesday with the ADP report, continued with Thursday's claims and finally the employment report," said Paulsen. "Quite frankly, the initial jobless claims may be the most important because it's the most timely. If they show a pattern of peaking, people are going to start spotting a bottom." Also Friday, the Institute for Supply Management will release its services index for March at 10 a.m. EDT. But by the time the ISM's report lands, traders will know whether conditions have fundamentally changed in the economy.
"Will everything suddenly look good from an economic point of view? No," Mendelsohn said. "But it looks like we're not falling into the end-of-the-world scenario and the depression everyone was talking about a month ago. That takes a lot of pressure off the market." Compared to the flood of economic releases, the flow of earnings reports will be very light. The highlight of next week's docket is Research In Motion's ( RIMM) fourth-quarter report, due out after the close of trading Thursday. Before that, homebuilder Lennar ( LEN) and education provider Apollo Group ( APOL), among others, will post quarterly results on Tuesday. Early Thursday, CarMax ( KMX), Rite Aid ( RAD) and Monsanto ( MON) will release their numbers. However, this may be the last quiet week on the earnings front for some time, as Alcoa ( AA) is scheduled to unofficially kick off earnings season when it reports April 7.