Week Ahead: Road Upward for Stocks Is Getting Rougher

The road higher for stocks is likely to be a slower, more difficult climb that could get bumpy along the way.

AP Wall Street Trader

For that reason, a number of strategists have been recommending investors steer clear of lower quality stocks and focus instead on those with better balance sheets for this next leg of the trip.

In the week ahead, markets will be tested by a fresh batch of economic news and will be dominated by the debate over whether the dollar's behavior signals the beginning of a turn for the greenback. Fed Chairman Ben Bernanke is in the spotlight Monday when he speaks at the Economic Club of Washington, and President Obama is expected to unveil a new plan to promote job creation Tuesday.

Retail sales, international trade and weekly jobless claims are some of the important numbers to watch. The Treasury is auctioning $74 billion in 3-years, 10-years and 30-year bonds Tuesday, Wednesday and Thursday.

Whither Stocks?

BlackRock Vice Chairman Bob Doll sees the stock market going higher but he says investors should be careful and invest a bit more defensively. He also said any correction would tend to be relatively shallow because of the uninvested cash on the sidelines, waiting to buy dips, and the fact that the recovery and bull market are in early stages.

"Here are the things that bug me a little bit. We've been churning for six or seven weeks. We've gone nowhere. Leadership? Where is it? Financial stocks have been underperformers. Volume has slowed noticeably," he said. Other concerns are that the broader Value line index has been trailing the S&P 500, meaning investors are becoming more discerning and are moving into higher quality names.

"Economic news has turned mixed from more positive. Bank credit contraction continues. Sentiment is still constructive but not as constructive as it was," he said.

"If the market closes out the year at our 1000 to 1050 (S&P) target, or where it is now, or a little higher or a little lower, people will look back at this year and go "whew"—A double digit gain after all that turmoil is a good thing," he said.

The year end is also a factor for investors. "I think we'll see rallies that are being met by sellers that want to close out their books for the end of the year," said Jefferies managing director Art Hogan.

"If you have to be invested, things are going to be more volatile. There was a period of time where the market was going to go up and you could put more risk in your portfolio. Now is not the time to do that," Hogan said.

Major U.S. Indexes

	Last	Change	Today's % Change	1 Week % Change	YTD % Change
Dow	10388.22	22.07	0.21%	0.76%	18.37%
NASDAQ	2194.35	21.21	0.98%	2.61%	39.14%
S&P 500	1105.89	5.97	0.54%	1.32%	22.43%
Russell 2000	602.79	14.01	2.38%	4.43%	20.69%
CBOE VIX	21.24	-1.22	-5.43%	-14.53%	-46.90%
FTSE CNBC Global 300	4548.41	-13.13	-0.29%	1.83%	26.08%

Stocks ended the past week higher, with the Dow up 0.8 percent at 10,399 and the S&P, up 1.3 percent at 1105. On Friday, markets broke free of the so-called "risk trade," where the dollar declines in the face of good news for the global recovery, and risk assets, like stocks and commodities, rise. The catalyst was the much better-than-expected November employment report—which showed the loss of just 11,000 non farm payrolls and a lower unemployment rate of 10 percent.

The dollar shot higher Friday, and the stock market also ended slightly higher. Bonds were under pressure and rates rose. The Dow traded both higher and lower in a 200 point-range but finished with a gain of 78 points. Commodities were mostly lower Friday, and gold was hit very hard, losing 4 percent to $1168.80 per ounce, after days of gains.

Financial shares were among the week's winners, gaining momentum to finish up 2.4 percent, after Bank of America's $19 billion secondary offering Thursday. Material stocks were up just a half percent and energy was down 1.6 percent. Both groups were hit by dollar-related selling Friday. The week's top group was the defensive utilities sector, up 3.9 percent.

"I don't want to abandon cyclicals because we are in a global recovery and fairly early on," said Doll. "I do think people who have had some of that can take a little money off the table and add a little quality to the portfolio. By that, I mean one less metal stock and one more health care stock." Doll said he is looking for companies with good cash flow that are in a good position to increase or initiate dividends.

"The path of least resistance is up, but it's going to be harder. It's going be more about the economy and earnings...and less about liquidity," Doll said.