Wall Street’s big week ahead

After a two-week advance, stocks are just shy of crossing into positive territory for 2010, but the week ahead brings hurdles that could challenge the momentum.

“The economy is in recovery mode, but it doesn’t feel like it for most people,” said John Canally, economist at LPL. “Add to that the issues being debated in Washington, ongoing questions about China and Greece and when the Fed might start to raise rates, and you’re bound to see a volatile market.”

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A bevy of reports on the housing market, employment and GDP growth are due this week. Federal Reserve Chairman Ben Bernanke heads to Capitol Hill to testify on the state of the economy and monetary policy. Also in Washington, lawmakers meet to debate the Toyota recall, the Treasury budget, bank health and whether more stimulus is needed.

Meanwhile investors are still looking at a broad market that is roughly 64% above 12-year lows lows hit in March 2009.

Selling peters out: Four weeks of declining markets were followed by two weeks of gains as the panic about China slowing its growth and Greece’s debt crisis spreading to the rest of Europe began to dissipate. The S&P 500 plunged 9.2% between January 2010 highs and early February lows, a loss that was shy of the technical definition of a correction, but sufficient to bring in some buyers.

But with the Dow, Nasdaq and S&P 500 all hovering just below where they ended last year, investors may be reluctant to push stocks much higher, particularly with concerns about unemployment, the U.S. deficit, inflation and Fed policy in play.

“I see stocks in a trading range for the rest of the first half,” said Stephen Leeb, president at Leeb Capital Management. “I think fears of inflation are well founded and they will cap the market, but the Fed will do what it can to make sure the economy doesn’t dip, so you’re left with a trading range.”

Fed: Investors were taken by surprise last week when the Federal Reserve raised the discount rate, the interest rate it charges banks seeking emergency loans, by a quarter-percentage point, to 0.75%.

Initially, the decision sparked a selloff as investors worried that the move meant the bank was getting closer to raising the more widely-watched fed funds rate, which affects consumer and company costs. That rate currently stands at historic lows near zero, where it has stood since December 2008.

But Fed officials and others shot down such a notion, saying the change was just part of the ongoing process of winding down some of the programs the central bank put in place during the height of the financial crisis.

“Raising the discount rate was symbolic,” said Jack Ablin, chief investment officer at Harris Private Bank. “I don’t see unemployment getting below 9% this year, so how can the Fed raise rates?”

In fact, the move could be seen as a positive going forward, Leeb said.

“It suggests that if that’s all the Fed is going to do to slow things down at this point in the cycle, easy money is going to still be around for a lot longer,” he said.

Chairman Ben Bernanke gives his semiannual testimony on the economy and Fed policy this week, speaking before the House Financial Services Committee Wednesday and the Senate Banking Committee Friday.

Here’s a look at the week’s other big events.

On the docket

Monday: Congress is back in session. Additionally, the provisions of the credit card act of 2009 go into effect.

There is no market-moving company or economic news scheduled.

Tuesday: A key measure of the housing market is expected to show prices fell for the second month in a row, following a period of seven months of rising prices.

The S&P/Case-Shiller 20-city home price index is expected to have fallen 3.1% in December versus a year ago after falling 5.3% in November, according to a consensus of economists surveyed by Briefing.com.

The Consumer Confidence index, from the Conference Board, is expected to have fallen to 55 in February from 55.9 in January.

Home Depot (HD, Fortune 500) is due to report results in the morning. The home improvement retailer is expected to have earned 16 cents per share versus 19 cents a year ago.

Target (TGT, Fortune 500) is expected to have earned $1.16 per share versus 81 cents a year ago.

In Washington, the House Financial Services Committee holds a hearing on whether more financial stimulus is needed.

Also, the Federal Deposit Insurance Corporation (FDIC) releases quarterly financial industry earnings as well as the bank problem list, identifying vulnerable banks.

Wednesday: The government’s new home sales report for January, due out in the morning, is expected to show that sales recovered a bit after plunging to a nine-month low in December. Sales are expected to have risen to a 355,000 annual unit rate from a 342,000 rate in December.

In Washington, the House Budget Committee holds a hearing on the Treasury Department’s fiscal-year 2011 budget. Treasury Secretary Timothy Geithner is scheduled to testify.

The House Oversight Committee holds a hearing on the Toyota recall, with CEO Akio Toyoda scheduled to testify. Transportation Secretary Ray LaHood and others are also due to speak.

Thursday: A busy day for economic news begins with the government’s weekly jobless claims report.

Around 460,000 Americans are expected to file new claims for unemployment, down from 472,000 in the previous week. Continuing claims, a measure of Americans receiving benefits for a week or more, is expected to have risen to 4.570 million from 4.563 million in the previous week.

The January durable goods orders index, from the Commerce Department, is expected to have risen 1.5% after rising 0.3% in the previous month.

The Federal Housing Finance Agency (FHFA) housing price index is also due in the morning.

In Washington, President Obama holds a bi-partisan health-care summit.

The House Financial Services Committee holds a hearing on financial-industry executive compensation.

Friday: Another busy day for economic news begins with the release of the second reading on fourth-quarter gross domestic product growth (GDP). GDP is expected to hold steady at 5.7%, unchanged from the first reading.

The Chicago PMI, a regional read on manufacturing, is expected to have fallen to 59.0 in February from 61.5 in January.

The revised reading on consumer sentiment from the University of Michigan is expected to have risen to 74 from 73.7.

Existing home sales are expected to have improved in January after falling in December. Sales are expected to have risen to a 5.50 million unit rate from a 5.45 million unit rate in December. The National Association of Realtors report is due out shortly after the start of trading

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