Henny Ray Abrams  /  AP
A trader on the floor of the New York Stock Exchange cheered the Dow's move above 11,000 earlier this month. The latest rally will be tested when companies begin reporting quarterly earnings this week.
updated 1/16/2006 4:23:44 PM ET 2006-01-16T21:23:44

When stocks rise without any kind of correction, consolidation or profit taking, it increases the risk that when stocks retreat — and they always do — the fall will be more pronounced than it would otherwise.

So last week's modest downturn after the Dow Jones industrials topped 11,000 for the first time in 4 1/2 years is considered very healthy. For one, it means that investors aren't falling prey to any irrational exuberance. And the fact that the markets ended slightly higher shows that bullish sentiment still prevails.

That sentiment will be tested in the week ahead, however, as the first crush of fourth-quarter earnings reports sweep the market. Given the positive sentiment on Wall Street, investors may be more inclined to buy if a company does well, but it's likely that they'll also be as unforgiving as ever if companies miss analysts' profit expectations.

In addition, important economic reports on inflation and consumers' moods are likely to affect trading in the coming week. Again, the overall mood on Wall Street remains positive, but only so far as inflation remains in check and consumers continue to increase spending.

Last week, the Dow topped 11,000 for the first time since June 2001, and the other major indexes also set multiyear highs as investors continued to anticipate an end to the Federal Reserve's interest rate hikes. But profit-taking ahead of earnings reports set in Thursday and Friday, limiting the gains. For the week, the Dow edged up 0.01 percent, the Standard & Poor's 500 index rose 0.17 percent, and the Nasdaq composite index climbed 0.5 percent.

The U.S. financial markets were closed Monday for Martin Luther King Jr. Day.

Economic data
A handful of key economic reports are due out the week ahead, the most important of which is arguably the Consumer Price Index, the Labor Department's measure of inflation on the retail level. The CPI, due Wednesday morning, is expected to rise 0.2 percent in December, up from a 0.6 percent decline in November. So-called "core" CPI, with food and fuel prices removed, is expected to rise 0.2 percent as well, on par with November's increase.

The market is particularly sensitive to inflation data right now, given that the Fed is only likely to stop raising rates as long as inflation remains low. Higher-than-expected increases in CPI could prompt more selling.

On Friday, the University of Michigan releases its preliminary report on consumer sentiment for January. The Michigan index is expected to rise to 93 from a 91.5 reading in December.

Several hundred companies are reporting earnings in the week ahead, including Dow industrials Citigroup, IBM Corp., Intel Corp., JPMorgan Chase & Co. and Pfizer Inc.

Among the other prominent names to issue earnings this week, expected increased scrutiny for Apple Computer Inc., fresh off last week's MacWorld product announcements and bullish revenues. Wall Street is expecting nothing less than a blockbuster quarter, and Apple will have to deliver, especially after reaching a new all-time high of $85.04 last week. The company is expected to earn 62 cents per share for the quarter, up from 35 cents per share a year ago. Apple shares closed Friday at $85.59.

General Electric, another Dow component, is always a closely watched company _ given it's presence in manufacturing, healthcare, finance and media, it's considered a microcosm of corporate America. The conglomerate is expected to earn 55 cents per share for the fourth quarter, up from 51 cents per share in 2004. Shares of GE have traded in a relatively narrow range of $32.67 to $37.34 over the past year, closing Friday at $35.10.

Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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