Wall Street likely to hit speed bumps this week

US stocks are likely to hit more speed bumps next week as investors become more wary of Wall Street's ability to rally further and housing starts, jobless claims and other indicators are in the spotlight.

With first-quarter earnings reports winding down and recent optimism about economic stabilisation already factored into stock prices, analysts said there appears to be very little on the horizon to help extend the recent run-up.

Quarterly earnings from rival home improvement chains Home Depot and Lowe's Cos Inc may shed some light on the consumer's ability and inclination to spend. The numbers may also give a hint of any further fallout from the housing slump.

Technology bellwether Hewlett-Packard also is scheduled to report results next week.

But after the benchmark S&P 500 rose 37 per cent from the 12-year closing low of early March, analysts and money managers said there is a risk that US stocks may be on the cusp of a long-predicted pullback.

Economic fundamentals probably will not justify more gains in the near term.

"There's been a little bit of exhaustion here," said Jeff Morris, vice-president at Boston-based Standard Life Investments, which manages more than $5 billion (Dh18.35bn) of US equity investments.

"It feels like we're going to be in a phase of having to deal with some negative data points like what we saw with April retail sales. Establishing the bottom is probably more a process of a back and forth rather than just deciding things have turned, and everything will be fine."

And if the choppiness of the recent sessions is any sign, the US stock market could be in for some volatile days ahead as the bulls scramble to keep the reins a little longer.

On Friday, US stocks succumbed to selling of some of the market's recent high-fliers, including banks and technology, driving the S&P 500 down to close out its worst week in two months.

For the week, the Dow Jones industrial average declined 3.6 per cent and the S& P 500 slid five per cent, while the Nasdaq fell 3.4 per cent.

Friday's sell-off resulted in the Nasdaq breaking a nine-week winning streak.

But the Nasdaq is still up 6.54 per cent for the year, while both the Dow and the S& P 500 are in the red. The Dow is down 5.79 per cent for 2009, while the S&P is off 2.26 per cent.

The sparse economic calendar also is likely to make next week a troublesome one for US stock investors. A major highlight will be April housing starts, set for release on Tuesday before Wall Street's opening bell. This report on housing starts and building permits will come out a day before the release of the minutes of the Federal Reserve's most recent policy meeting on April 28-29.

Economists polled by Reuters expect that US housing starts rose to a seasonally adjusted annual rate of 520,000 units in April, compared with the March pace of 510,000, which was the second lowest on records dating back to 1959.

On Thursday, the focus will be on weekly jobless claims and the Federal Reserve Bank of Philadelphia's May snapshot of business conditions in the U.S. Mid-Atlantic region. The economic data will get added scrutiny as investors look for direction and more confirmation that the recession that started in December 2007 is easing.

"We're at a crossroads right now. You've got a market that's ramped up, an economy that hasn't necessarily ramped up whatsoever and so now we're into this pause," said John Schloegel, vice-president of investment strategies for Capital Cities Asset Management in Austin, Texas.

"It's a tug of war between the buoyant positivity that we've had for two months with the reality of the economics maybe not quite running parallel to the positive vibes on the stock market."

Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.