Wall St Week Ahead-Gambling on a stocks break-out

By Edward Krudy

NEW YORK, April 1 (Reuters) – The Standard & Poor’s 500
index is poised to hit its highest in nearly three years next
week after more signs of life from the jobs market, but think
twice before you bet the house.

Many investors are coming to the view that the U.S.
employment situation has turned a corner, but the risks that
sent stocks cascading between mid-February and mid-March are as
real as ever.

In addition, the surprisingly robust recovery shown in
recent economic data has some investors nervous that the
Federal Reserve may end its easy money policies before schedule
and hike interest rates in the second half of the year.

That could be spell trouble for risk assets such as stocks
and commodities that have benefited from the added liquidity
provided by the Fed’s $600 billion Treasury bond buying. The
program, known as quantitative easing, or QE2, is slated to end
in June.

“The Fed is now going to much more seriously consider early
withdrawal of QE2 because these numbers are getting stronger,”
said Kenneth Polcari, managing director at Icap Corporates, a
floor broker at NYSE.

One Fed official poured cold water on that idea on Friday,
saying he saw no reason to reverse course even as the economy
adds jobs. The comments helped cement optimism over the jobs
data.

RECOVERING LOSSES

Polcari said the data would provide the fuel to send the
S&P 500 to 1,350 next week.

The Dow rose to its highest level in almost three years
intraday on Friday, recovering most of its losses since
February, as U.S. employment recorded a second straight month
of solid gains in March and the jobless rate fell to a two-year
low.

The jobs report chimed with the view that the U.S. recovery
is becoming self-sustaining.

“The numbers are looking pretty powerful,” said Jim Awad,
managing director at Zephyr Management New York.

“You have got strong and perhaps accelerating economic
growth, you have good profit growth, you have fair valuations,
you have momentum, and you have high merger and acquisitions
activity.”

But uncertainty arising from world trouble spots shows
scant sign of abating and is likely to contain stock prices.

U.S. crude hit its highest this year, driven largely by
unrest in the Middle East. Ratings agencies warned of trouble
ahead for debt-laden Ireland and Japan looked set for a
long-haul in containing its nuclear crisis.

“INVESTORS SHOULD BE CAUTIOUS”

But for the time being investors seem content to focus on
the United States. How long that continues will depend to a
large extent on whether the economy lives up to expectations.

“Two months of improvement does not satisfy the definition
of a trend,” said Chad Morganlander, portfolio manager at
Stifel Nicolaus & Co in Florham Park, New Jersey. “Investors
should be cautious.”

Weekly jobless claims data on next Thursday will be closely
watched and are expected to highlight the improving trend in
the labor market, while a report on the non-manufacturing
sector on Tuesday is also tipped to point to growth.

William Dudley, president of the New York Federal Reserve
Bank, said the economy could add jobs more rapidly in the
months ahead. He said he saw no reason to cut short the Fed’s
quantitative easing program.

Investors will look to other Fed officials to confirm those
sentiments next week.

Chairman Ben Bernanke will speak on Monday, Atlanta Fed
President Dennis Lockhart has three speaking engagements and
Richmond Fed President Jeffrey Lacker will speak on Thursday.

An optimistic but cautious view from the Fed is likely to
keep expectations for an interest rate hike under wraps.

Following Dudley’s comments on Friday, futures implied a 38
percent chance the U.S. central bank would raise rates from
near zero to 0.50 percent after its December policy meeting.
After the release of the payrolls data, but prior to Dudley’s
comments, futures implied a 64 percent chance of such a move,
up from 32 percent.

Even when the S&P 500 does get up to its recovery high of
1,344, it is likely to run into some resistance when traders
that bought at the high close out positions at break-even.

Bob Doll, chief equity strategist at BlackRock, recently
told Reuters that he expects the S&P 500 to be range-bound
between 1,250 and 1,330 until until there is more clarity on
risk, particularly the price of oil.

For a graphic of resistance on the S&P 500 see

http://r.reuters.com/nac88r

However, investors who like market seasonalities, have
reason to be bullish. April is the best month for the Dow
industrials, which have averaged a 2 percent gain during the
month since 1950, according to the Stock Traders Almanac.
(Additional reporting by Chris Reese; Editing by Kenneth
Barry)

Wall St Week Ahead-Gambling on a stocks break-out