US--WallStreet-WeekAh

A week laden with key economic reports and results of stress tests on banks will determine whether Wall Street is ready to rally further or take a sharp U-turn.

The government’s assessment of the health of 19 big banks plus April employment data and retail sales reports will be the latest challenges to a rally that has driven stocks to their best two-month performance in nearly 35 years. Since March 9, the Dow Jones industrial average is up 25.4% and the Standard & Poor’s 500 index has gained 29.7%.

Since the rally began, investors have been questioning whether Wall Street has seen a bottom after the devastating losses of the fall and winter, or whether the advance has been based on faulty speculation.

But as the gains stretch into a third month, and data continue to suggest that the economy’s slide is slowing, confidence is building that the market has the potential to keep moving higher.

“It takes a while for market participants to shift gears and really believe in what we’re seeing,” said Keith Walter of the Artio Global Equity Fund.

Although some observers are still skeptical or at the least cautious about the rally, the market’s performance during previous recessions has shown that stocks tend to hit bottom an average of four months before a recession ends.

Investors have kept buying although first-quarter earnings reports have been mixed, layoffs continue and worries persist about some of the nation’s biggest banks. Concerns about a potential swine flu pandemic and the bankruptcy filing of Chrysler did little to throw the market off course last week.

“This week coming up will be very telling to see if the market can hold on to these gains without any meaningful pullbacks,” said David Kreinces, a manager at ETF Portfolio Management in Newbury Park.

The biggest threat to the rally this week is likely to be the results of the stress tests the government is performing on the 19 largest U.S. banks. The government is expected release its findings Thursday.

The tests are designed to determine which banks would need more cash if the economy weakens further. Federal Reserve officials have said the banks will be required to keep extra capital on hand in case losses escalate, so some banks would be forced to raise money.

The stress tests “have the potential for being a massively disruptive market event,” Walter said. “But I don’t think it will be, because it’s not in the government’s best interest to paint a picture like that.”

The April employment report, to be issued Friday, will be another hurdle for the market.

Employers cut 663,000 jobs in March, sending the unemployment rate up to 8.5% -- the highest level in more than 25 years. But the day that report was released, investors looked past the grim numbers, sending the Dow above 8,000 for the first time in nearly two months.

The market also will get more insight into consumers’ willingness to spend this week when major retailers report April sales results. How retailers are doing is crucial because consumer spending accounts for more than two-thirds of U.S. economic activity.

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At a glance

TODAY

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

Commerce Department releases construction spending for March.

Quarterly results expected from E.W. Scripps., Sprint Nextel and Tyson Foods.

TUESDAY

The Institute for Supply Management releases its nonmanufacturing index for April.

Senate Finance Committee hearing on healthcare.

House Financial Services Committee hearing on the impact of the Lehman Bros. bankruptcy on state and local governments.

Quarterly results expected from Archer Daniels Midland, Avon Products., CVS Caremark, Duke Energy, Electronic Arts, Kraft Foods, Marvel Entertainment, Molson Coors Brewing, Pulte Homes, Tenet Healthcare, Walt Disney, Weyerhaeuser and Wynn Resorts.

WEDNESDAY

Senate Banking, Housing and Urban Affairs Committee hearing on financial institutions deemed “too big to fail.”

Quarterly results expected from Anadarko Petroleum, Cisco Systems, Marsh & McLennan, News Corp. and Prudential Financial.

THURSDAY

Major retailers report sales results.

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

Federal Reserve releases consumer credit data for March.

Mortgage financing company Freddie Mac releases weekly mortgage rates.

Quarterly results expected from Allstate, Cablevision Systems, CBS Corp., DirecTV Group, D.R. Horton, Dynegy, Lee Enterprises, Live Nation, Nasdaq OMX Group, Sara Lee, Thomson Reuters and Wendy’s/Arby’s Group.

FRIDAY

Labor Department releases unemployment data for April.

Commerce Department releases wholesale trade inventories for March.

Quarterly results expected from Berkshire Hathaway.