Stocks may suffer from rally fatigue

The stock market is looking winded from its three-month race upward.

After a quick bounce off 12-year lows in early March, Wall Street is having a harder time carving advances as investors await definitive signs of a break in the recession.

The benchmark Standard & Poor’s 500 index rose 5.3% in May, but that was less than its 9.4% surge in April.

Traders have been buying stocks on kernels of economic data and corporate earnings reports that indicate the economy’s slide could be slowing. But some analysts say investors might be getting ahead of themselves.

“A turning point in sentiment indicators is not a turning point in real indicators,” said Bruno Cavalier, lead economic analyst at Oddo Securities in Paris. “We remain quite cautious about the global outlook.”

It’s normal for the market to move before the economy does, but traders also risk stepping into the market too early. In downturns over the last 60 years, the S&P; 500 index has hit bottom an average of four months before a recession ended and about nine months before unemployment hit its peak.

Wall Street could be in for a more difficult climb as it waits for the economy to catch up with investor expectations, some analysts say. The S&P; 500 index already has shot up 35.9% since March 9, a run that might normally take years to occur.

The coming week’s full calendar of economic readings could help steer the market. Lately, there has not been enough good news to persuade cautious investors to buy. Traders are often simply shifting money around to capitalize on the market’s gyrations, analysts say.

“There’s no new money coming into equity funds,” said Joe Saluzzi, co-head of equity trading at Themis Trading in Chatham, N.J. He sees little to celebrate in the economy, pointing to General Motors Corp.’s expected bankruptcy filing. “There’s nothing good out there.”

As the spring rally progressed through its first two months, economic readings that looked a little better than the market’s grim forecasts incited heavy buying. Now, though, the snapshots of the economy are likely to be more mixed and could lead to more volatility.

“Some investors have come to expect better-than-expected economic data, and that does make the market a little more vulnerable, obviously much more so than back in March,” said Todd Salamone, senior vice president of research at Schaeffer’s Investment Research Inc. in Cincinnati.

One example of the divide in expectations came Friday when the Commerce Department reported the economy slowed at a 5.7% annual pace in the first quarter. That wasn’t as bad as the 6.1% slide the government first estimated in April, but it was steeper than the 5.5% drop economists expected.

This week, traders will focus on the Labor Department’s May employment report due Friday. The report is often seen as the most important economic reading of the month because rising unemployment can hurt consumer spending, which accounts for more than two-thirds of U.S. economic activity.

Economists expect unemployment, which stands at a 25-year-high of 8.9%, to increase. But any sign that job losses are slowing could help the market.

Before that report, the Commerce Department is expected on Monday to release figures on personal income and spending as well as construction spending for April.

The Institute for Supply Management is expected to issue monthly reports on the manufacturing sector on Monday and the services sector on Wednesday.

The National Assn. of Realtors report on pending home sales in April is slated for Tuesday. Major automakers will report U.S. sales for May that day.

GM, meanwhile, is expected to file for Chapter 11 today. The market has been preparing for the automaker to reorganize, but the reality of the company seeking bankruptcy could still bruise investor sentiment.

Among other economic reports, the Commerce Department on Wednesday is expected to release data on April factory orders. On Thursday, retailers will report May sales.

Few earnings reports are expected. Home builder Hovnanian Enterprises Inc. is expected to report fiscal second-quarter numbers Tuesday, and builder Toll Bros. Inc. is expected to report results Wednesday.

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At a glance

TODAY

Commerce Department releases reports for April on personal income and spending and on construction spending.

The Institute for Supply Management releases its manufacturing index for May.

TUESDAY

National Assn. of Realtors releases pending home sales index for April.

Major automakers report U.S. sales for May.

Earnings reports expected from Hovnanian Enterprises and First Financial Bankshares.

WEDNESDAY

Commerce Department releases report on factory orders for April.

Federal Reserve Chairman Ben S. Bernanke testifies about the economy at a House Budget Committee hearing.

The Institute for Supply Management releases its non-manufacturing index for May.

Earnings reports expected from SAIC and Toll Bros.

THURSDAY

Labor Department releases reports on weekly jobless claims and on productivity for the first quarter.

Mortgage financing company Freddie Mac releases report on weekly mortgage rates.

Retailers report sales results.

FRIDAY

Labor Department releases unemployment data for May.

Federal Reserve releases consumer credit data for April.