Seeking Direction, Market Braces for Data

By MARK GONGLOFF A new season arrives this week, possibly in more ways than one. Sunday brought the summer solstice. The workweek brings another slew of economic data with the potential to push the stock market out of its recent rut. Sales reports on preowned and new homes are due Tuesday and Wednesday, respectively. The Fed wraps up a two-day policy meeting Wednesday, and the Census Bureau releases May durable-goods numbers. Weekly jobless-claims data come Thursday, and the Commerce Department reports Friday on May personal income and spending. For the past several months, the direction of stocks, commodities and other risky assets has been driven at least partly by whether economic reports have surprised to the upside or downside. William Hester, market analyst at Hussman Funds, keeps an index of economic surprises: a three-month running tally of the number of reports that beat expectations, minus the number of disappointments. That index has roughly tracked the stock market for much of the past year. The March market rally was born amid a sharp upswing in data beating market expectations. Economists and investors were braced for apocalypse, so merely horrible numbers became pleasant surprises and encouraged risk-taking. After a few months of that, most of the juice has been wrung from the "less-bad" sponge. Pleasant surprises are rarer as expectations have risen, and the market has lost steam. Downside surprises, like the latest industrial-production and retail-sales numbers, spark selloffs. "Equity investors need confirmation that nothing worse is coming," says Tobias Levkovich, Citigroup's chief U.S. equity strategist. "If there's a hiccup, then the market reacts badly." Mr. Levkovich believes the market can still "grind higher" as long as there isn't any backsliding in economic data. More-bearish analysts think stocks are priced for a robust recovery and will need increasingly positive surprises to avoid a collapse, just as an addict needs ever-more-potent fixes. The Dow Jones Industrial Average is still down 25% from its level before the Lehman Brothers collapse, suggesting the market could handle a subpar recovery. But a more-significant rally from here will depend, in no small part, on economic data surprising again, and the bar has gotten higher. Email: tape@wsj.com