Wall Street: The rally test

Investors return to work on the back of Wall Street's best week in months - and that's both a good and bad thing.

"I think it's going to take a lot more time for the economy to work through all the issues, but the valuations on certain companies are appealing," said Gary Flam, portfolio manager at Bel Air Investment Advisors.

He said that the current cycle could follow the path of the economic era it is most often compared to: the 1930s. He said that during that period, the stock market bottomed in 1932, but the Great Depression stretched on for several more years.

The week ahead brings reports on manufacturing, housing, consumer and wholesale prices and the next Federal Reserve policy meeting. The economic news is set to show what investors already know - that the economy remains in recession. But what's more important is how investors react to the news.

The Dow and S&P 500 ricocheted off 12-year lows to spike more than 10% in just four sessions, while the Nasdaq bounced off six-year lows to jump almost 13%. That short sharp advance has left investors both hopeful that the market could be closer to stabilizing - and wary that the gains were just an illusion.
0:00 /02:39Life in the pits

Eye on banks: In the short run, the financial sector and the U.S. government remain the drivers of the market.

Last week, Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500) all said that they were profitable in the first two months of the year. But the quarter isn't over and investors will be looking to see that the earnings actually reported next month back up those claims.

Ahead of that, investors will continue to look to the government for guidance. Talk about reinstating the "uptick rule" that limits short selling and changing mark-to-market accounting fed the advance last week and anything related could help stocks sustain the advance this week.

"The investor class is looking at the Congress, the president and the regulatory system to show them they can have confidence," said Mike Stanfield, CEO of VSR Financial Services.

"People understand that being in the market means taking a risk, but they don't want to be part of a system that they think is rigged," he said. "They want to know that someone is looking out for them."
On the docket

Monday: February industrial production and factory output are on track to continue to decline as the recession wears on.

Production is expected to have fallen by a seasonally adjusted 1.2% in February after falling by 1.8% in January, according to a consensus of economists surveyed by Briefing.com. Capacity utilization, a measure of factory output, is expected to drop to a seasonally adjusted 71.1% from 72% in January.

The NY Empire State index, a key regional manufacturing report, is expected to have improved marginally after hitting a record low last month. The index is expected to have improved to a reading of negative 32 in March from negative 34.7 in February.

Also due: The National Association of Home Builders report on homebuilders' confidence in the current market and the outlook six months from now.

Tuesday: Reports on housing and wholesale inflation are due in the morning.

Housing starts are expected to have fallen to a 453,000 annual unit rate in February from a 466,000 unit annual rate in January. Building permits are expected to have fallen to a 510,000 annual rate from a 531,000 annual unit rate in January.

The Producer Price Index (PPI), a measure of wholesale inflation, likely rose 0.4% in February after rising 0.8% in the previous month. The so-called Core PPI, which strips out volatile food and energy prices, rose 0.1% after rising 0.4% in the previous month.

Wednesday: The Consumer Price index (CPI), a read on consumer inflation, is due in the morning. CPI is expected to have risen 0.3% in February after rising 0.3% in January. The Core CPI is expected to have risen 0.1% after rising 0.2% in January.

The latest interest-rate decision from the Federal Reserve is due Wednesday afternoon at the conclusion of the two-day policy meeting. The Fed is expected to hold rates steady near zero and to say that it is ready to take additional steps to help mend the U.S. economy and credit markets.

Thursday: The Philadelphia Fed index, another regional reading on manufacturing, is expected to have improved modestly to 40.0 in March from 41.3 in February.

The index of leading economic indicators is expected to have fallen 0.6% in February after falling 0.4% in January.

The weekly jobless claims report is also on tap.

Friday: Fed Chairman Ben Bernanke speaks in Phoenix on the financial crisis and community banking.