Wall St Week Ahead: Bears hibernate as stocks near record highs

NEW YORK, Jan 25 (Reuters) - U.S. stocks have been on a tear

in January, moving major indexes within striking distance of

all-time highs. The bearish case is a difficult one to make

right now.

Earnings have exceeded expectations, the housing and labor

markets have strengthened, lawmakers in Washington no longer

seem to be the roadblock that they were for most of 2012, and

money has returned to stock funds again.

The Standard & Poor's 500 Index has gained 5.4

percent this year and closed above 1,500 - climbing to the spot

where Wall Street strategists expected it to be by mid-year. The

Dow Jones industrial average is 2.2 percent away from

all-time highs reached in October 2007. The Dow ended Friday's

session at 13,895.98, its highest close since Oct. 31, 2007.

The S&P has risen for four straight weeks and eight

consecutive sessions, the longest streak of days since 2004. On

Friday, the benchmark S&P 500 ended at 1,502.96 - its first

close above 1,500 in more than five years.

"Once we break above a resistance level at 1,510, we

dramatically increase the probability that we break the highs of

2007," said Walter Zimmermann, technical analyst at United-ICAP,

in Jersey City, New Jersey. "That may be the start of a rise

that could take equities near 1,800 within the next few years."

The most recent Reuters poll of Wall Street strategists

estimated the benchmark index would rise to 1,550 by year-end, a

target that is 3.1 percent away from current levels. That would

put the S&P 500 a stone's throw from the index's all-time

intraday high of 1,576.09 reached on Oct. 11, 2007.

The new year has brought a sharp increase in flows into U.S.

equity mutual funds, and that has helped stocks rack up four

straight weeks of gains, with strength in big- and small-caps

alike.

That's not to say there aren't concerns. Economic growth has

been steady, but not as strong as many had hoped. The household

unemployment rate remains high at 7.8 percent. And more than 75

percent of the stocks in the S&P 500 are above their 26-week

highs, suggesting the buying has come too far, too fast.

MUTUAL FUND INVESTORS COME BACK

All 10 S&P 500 industry sectors are higher in 2013, in part

because of new money flowing into equity funds. Investors in

U.S.-based funds committed $3.66 billion to stock mutual funds

in the latest week, the third straight week of big gains for the

funds, data from Thomson Reuters' Lipper service showed on

Thursday.

Energy shares lead the way with a gain of 6.6

percent, followed by industrials, up 6.3 percent.

Telecom, a defensive play that underperforms in periods

of growth, is the weakest sector - up 0.1 percent for the year.

More than 350 stocks hit new highs on Friday alone on the

New York Stock Exchange. The Dow Jones Transportation Average

recently climbed to an all-time high, with stocks in this

sector and other economic bellwethers posting strong gains

almost daily.

"If you peel back the onion a little bit, you start to look

at companies like Precision Castparts, Honeywell

, 3M Co and Illinois Tool Works - these

are big, broad-based industrial companies in the U.S. and they

are all hitting new highs, and doing very well. That is the real

story," said Mike Binger, portfolio manager at Gradient

Investments, in Shoreview, Minnesota.

The gains have run across asset sizes as well. The S&P

small-cap index has jumped 6.7 percent and the S&P

mid-cap index has shot up 7.5 percent so far this year.

Exchange-traded funds have seen year-to-date inflows of

$15.6 billion, with fairly even flows across the small-, mid-

and large-cap categories, according to Nicholas Colas, chief

market strategist at the ConvergEx Group, in New York.

"Investors aren't really differentiating among asset sizes.

They just want broad equity exposure," Colas said.

The market has shown resilience to weak news. On Thursday,

the S&P 500 held steady despite a 12 percent slide in shares of

Apple after the iPhone and iPad maker's results. The tech giant

is heavily weighted in both the S&P 500 and Nasdaq 100

and in the past, its drop has suffocated stocks' broader gains.

JOBS DATA MAY TEST THE RALLY

In the last few days, the ratio of stocks hitting new highs

versus those hitting new lows on a daily basis has started to

diminish - a potential sign that the rally is narrowing to fewer

names - and could be running out of gas.

Investors have also cited sentiment surveys that indicate

high levels of bullishness among newsletter writers, a

contrarian indicator, and momentum indicators are starting to

also suggest the rally has perhaps come too far.

The market's resilience could be tested next week with

Friday's release of the January non-farm payrolls report. About

155,000 jobs are seen being added in the month and the

unemployment rate is expected to hold steady at 7.8 percent.

"Staying over 1,500 sends up a flag of profit taking," said

Jerry Harris, president of asset management at Sterne Agee, in

Birmingham, Alabama. "Since recent jobless claims have made us

optimistic on payrolls, if that doesn't come through, it will be

a real risk to the rally."

A number of marquee names will report earnings next week,

including bellwether companies such as Caterpillar Inc,

Amazon.com Inc, Ford Motor Co and Pfizer Inc

.

On a historic basis, valuations remain relatively low - the

S&P 500's current price-to-earnings ratio sits at 15.66, which

is just a tad above the historic level of 15.

Worries about the U.S. stock market's recent strength do not

mean the market is in a bubble. Investors clearly don't feel

that way at the moment.

"We're seeing more interest in equities overall, and a lot

of flows from bonds into stocks," said Paul Zemsky, who helps

oversee $445 billion as the New York-based head of asset

allocation at ING Investment Management. "We've been increasing

our exposure to risky assets."

For the week, the Dow climbed 1.8 percent, the S&P 500 rose

1.1 percent and the Nasdaq advanced 0.5 percent.

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