NEW YORK – U.S. stock investors know that oil can be a double-edged sword, with last week's drop in crude prices hitting energy shares and taking the shine off one of last year's strongest sectors.
But their portfolios could benefit this week — if crude gets cheaper and the broader stock market rallies on the prospect of lower energy costs.
"If there was a catalyst ... it's going to be the fact that the pullback in oil and natural gas has been fairly significant and that should ease some inflation fears," said Fred Dickson, strategist at D.A. Davidson & Co.
Oil futures prices are down about $6 from late January.
U.S. crude oil for March delivery finished Friday's session below $62 a barrel, with selling driven by hefty petroleum stockpiles. March natural gas futures hit a six-month low on Friday, reflecting a growing surplus.
Investors will get their first chance to hear Federal Reserve Chairman Ben Bernanke next week, when he gives his first semi-annual report on monetary policy before two congressional committees. Bernanke succeeded Alan Greenspan, who retired on January 31 after 18-1/2 years as Fed chairman.
On Wednesday, Bernanke will appear before the House Financial Services Committee, while on Thursday, he will give the same report to the Senate Banking Committee. He will answer questions each day.
"Bernanke's testimony is likely to be quite guarded," Goldman Sachs economists said in a report.
Last week, investors got nervous when Michael Moskow, the president of the Chicago Federal Reserve Bank, said U.S. interest rates are at a neutral level, but further rate increases may be needed, depending on how inflation develops.
Looking for Leadership
But stocks may not go anywhere until they have found new market leaders, analysts said.
Some of the strongest sectors from 2005, including energy and housing stocks, reversed course last week following a sharp decline in crude oil prices and a sales warning from a leading luxury home builder, Toll Brothers Inc. (TOL). On Friday, an S&P oil and gas index fell 0.7 percent, while the Dow Jones U.S. Home Construction Index dropped 1.1 percent.
Investors' enthusiasm for materials stocks, another one of last year's best-performing sectors, and some technology stocks like Google Inc. (GOOG), has waned recently.
"Right now, the market is going through rapid rotation and very little stability in the process of trying to find sector leadership," Dickson said.
In the data-heavy week ahead, earnings reports will be in focus, and investors may pay extra attention to retail sales, housing starts and the Producer Price Index.
Last week, the Dow Jones industrial average rose 1.2 percent, while the Standard & Poor's 500 Index edged up 0.2 percent. The Nasdaq Composite Index dipped 0.03 percent.
"The market seems to have put in a little bit of a base here," said Mike O'Hare, head of listed trading at Lehman Brothers.
The S&P 500 Index held around the 1,260 level for most of the week, suggesting there is not yet a meaningful catalyst to push stocks in one direction or another, O'Hare said.
Listening for Ka-Ching!
Retail stocks will be in focus this week as investors look at retailers' earnings for clues about how much consumers spent in the important holiday season.
"There has been a great deal of concern about the consumer, and we've had some indications that the consumer has returned with some strength," said Milton Ezrati, senior economic strategist at Lord, Abbett & Co. "Obviously, if that's confirmed, that's good for the market."
Investors may be expecting strong reports, particularly after Best Buy Co. Inc. (BBY) raised its profit forecast last week.
Weekly store sales and January retail sales are due on Tuesday, which happens to be Valentine's Day, a holiday that quickens the pulse of some retailers. Economists surveyed by Reuters estimate that January retail sales rose 0.8 percent, up from December's 0.7 percent gain.
The University of Michigan's preliminary consumer sentiment data for February will be out on Friday.
Housing and Inflation Snapshot
This week's economic data may offer clues on inflation and how many more rate increases might be ahead.
January housing starts, due on Thursday, could signal whether the housing market is really beginning to slow.
The forecast calls for January housing starts to rise to an annualized rate of 2 million units from December's pace of 1.933 million, according to a Reuters poll of economists.
Investors are worried about the bond market's inverted yield curve, which occurs when the yield of the two-year U.S. Treasury note exceeds the benchmark 10-year note's yield. The yield curve's inversion grew last week after the first auction of 30-year U.S. Treasury bonds since 2001. An inverted yield curve often precedes an economic slowdown.
The U.S. Producer Price Index for January will be released on Friday. Overall PPI is expected to have risen 0.2 percent in January, compared with December's gain of 0.9 percent, according to the Reuters poll. The index is a gauge of inflation at the wholesale level.
The forecast for core PPI, which excludes volatile food and energy prices, is a 0.2 percent gain in January, after December's rise of only 0.1 percent, the Reuters poll showed.