Stocks may drop this week or tread water as a seven-week rally sparked by hopes for an economic recovery loses steam.

The rally was driven by optimism that the federal reserve's big interest rate cuts this year will eventually kick in and produce an economic turn-around. 

"I would not at all be surprised to see some backing and filling because we have had a good rally," said Robert Baur, head of trading at Invista Capital Management which oversees about $24 billion. Some consolidation "would not be unlikely." 

The third-quarter earnings season — the most dismal in a decade with a 20 percent decline in profits — is drawing to an end. Still, this week's earnings reports will be from heavyweight retailers Wal-Mart Stores and Home Depot, and marquee tech names like computer chip equipment maker Applied Materials and computer builders Dell Computer and Hewlett-Packard. 

"The focus of the market place is continuing to be what the outlook for the economy, sales and earnings might be six to 12 month down the road," said Michael Strauss, managing director and senior economist at Commonfund, which manages about $26 billion. "Clearly the aggressive easing by the Federal Reserve and the fiscal stimulus that we have gotten did help the stock market in the last six weeks." 

The economic calendar brings a mixed bag of economic data, with industrial production numbers for October likely to paint a dismal picture for the sagging U.S. economy, which many now believe to be in recession. 

But a pleasant surprise may unfold from expected tame inflation and solid retail sales data. Last month, Americans snatched up cars and other items at a rapid clip as companies dangled lucrative incentives such as zero-percent financing on new auto purchases. 

Among other companies reporting earnings this week are retailer J.C. Penney and software firm BEA Systems, communications networks company Global Crossing, data storage systems maker Network Appliance and optical networking firm Sycamore Networks. 

Stocks' Pullback Predicted 

Market watchers believe it could be time for a pullback after the impressive rally that has lifted the key stock market indexes from three-year lows after the devastating Sept. 11 attacks, with the selling at a climax on Sept. 21. 

"We've had a pretty large snap back from a climactic selling period in September so some consolidation of those gains is likely to happen for a while," said Eugene March, portfolio manager at $1 billion Armada Equity Growth Fund. 

The rally, on a closing basis, sent the blue-chip Dow Jones industrial average and the broad Standard & Poor's 500 up about 16 percent and the technology-laden Nasdaq composite and Nasdaq 100 a whopping 28 and 34 percent, respectively. From top to bottom, the gains are even bigger, and other pundits think a pullback is in order. 

"The recent gains ... not to mention the respectable gains seen since Sept. 21 ... appear to have set the stage for some corrective activity," Ralph Acampora, Prudential Securities' chief technical analyst, told clients in a note. "This does not immediately lead us to abandon buy ideas mentioned in recent weeks, but does imply a period of caution directly ahead." 

The Nasdaq rose nearly 5 percent for the week ended Nov. 9. The Dow and S&P 500 both finished the week up about 3 percent. 

The wild card remains developments in the U.S.-led fight in Afghanistan, pundits say. The attacks are aimed at flushing out Usama bin Laden, suspected of masterminding the September attacks on the World Trade Center and the Pentagon in which some 4,800 people were killed. 

"We've already had a pretty big rally," Armada's March said. "Percentage-wise you are not likely to have that happen again. So depending upon the economic news that develops and ... how this war develops," that "would probably set the tone for how the market reacts for the rest of the year." 

Retail Sales and CPI on Tap 

October retail sales report data is slated for release on Wednesday by 8:30 a.m. EST. The forecast calls for a rise of 2 percent, compared with a drop of 2.4 percent in September. Excluding auto sales, the report is likely to show retail sales gained just 0.1 percent, reversing September's decline of 1.6 percent. 

On Friday, the October Consumer Price Index (CPI) measure of inflation at the retail level will be released ahead of the market open, and is expected to show a down tick of 0.1 percent versus a rise of 0.4 percent in September. Excluding volatile energy and food prices, the index is seen showing a rise of 0.1 percent, down from a gain of 0.2 percent in the prior month. 

"Even though they [retail sales] are incentive related, but nonetheless they should have a positive impact and an outright decline in CPI might also have some positive impact as well," Strauss said. 

On a less upbeat note, October industrial production data, due before the market opens Friday, is expected to show a decline of 0.8 percent after a drop of 1 percent in September. Capacity utilization is forecast at 74.7 percent, down from 75.50 percent. 

The Sept. 11 attacks accelerated the rate of the economy's decline and the deteriorating economic data. This means a lot has been priced into stock prices. 

Invista's Baur said: "The market is ignoring some bad news and trying to look ahead."