Stocks on hold, with oil a hurdle

NEW YORK (Reuters) - Stocks are within spitting distance of crossing a milestone this week that could propel the market out of its trading range, but surging oil prices and economic uncertainty pose major obstacles.

So far this month, stocks have managed to hang on to the gains made during the April recovery as the first-quarter earnings season passed without many shocking disappointments, despite the credit crisis and slackening economy.

All three major indexes came close last week to topping their 200-day moving averages, a level that would signal positive momentum.

"That's the yardstick people use to measure the big-picture trend. They put a lot of importance on that in the equity market," said Bill Strazzullo, chief market strategist at Bell Curve Trading in Boston.

But as the earnings season winds down, the market will have to take more of its cues from economic indicators such as retail sales and CPI, and other assets such as currencies and commodities, rather than corporate profits.

Investors may be more inclined to book tidy profits earned since the March lows, than wait and see how the data pans out.

"What people are realizing is that we've had a great run and they'll get out of positions they're not comfortable with. There's been a fair amount of skepticism about the rally," Strazzullo said. "The volume on the upside wasn't the greatest, which tells you a lot of people never bought into the fact that things are appreciably better."

RUNAWAY OIL PRICES AND CPI

Oil's swift ascent past the $126-per-barrel level took some steam out of equities, with the Dow ending the week down 2.4 percent, the S&P 500 down 1.8 percent and the Nasdaq off 1.3 percent.

"Oil is a huge story. The consumer cyclicals are already counted out," said Manny Weintraub, founder of money management firm Integre Advisors in New York. "It's not new news, it's just more bad news for the average consumer."

Just how badly consumers are being affected by higher pump prices may be further revealed on Tuesday, when the Commerce Department reports April retail sales.

Several dozen chain stores reported their own monthly numbers last week, with the majority posting an improvement from a year earlier. Discounters fared particularly well as cash-strapped consumers sought out bargains.

At the tail-end of the earnings calendar are several major retailers, beginning with Wal-Mart Stores Inc (WMT.N) on Tuesday. Investors will pay particular attention to the world's largest retail chain for any outlook about how consumers are spending the government stimulus checks that taxpayers are beginning to receive.

Department store Macy's Inc (M.N) reports its quarterly results on Wednesday, ahead of rivals J.C. Penney Co Inc (JCP.N) and Nordstrom Inc (JWN.N) on Thursday.

The Consumer Price Index, set for release on Wednesday, looms large in investors' minds. The data will show whether higher food and fuel prices are trickling through the economy and sending the cost of other goods higher.

Economists polled by Reuters expect the overall CPI to gain 0.3 percent in April, matching the increase of 0.3 percent in March. Core CPI, excluding volatile food and energy prices, is forecast to rise 0.2 percent in April, matching the 0.2 percent increase in the previous month.

The CPI data may also give a clue about the Federal Reserve's next monetary policy move. Rate futures show expectations leaning to the Fed keeping its benchmark fed funds rate unchanged at 2 percent and a 16 percent chance of an additional 25-basis-point cut.

But as oil prices skyrocket, Wall Street may become increasingly more concerned about inflation rather than about economic growth.

"There's a lot of people saying the Federal Reserve has gone too far in pumping out a lot of liquidity and that they've embarked on an inflationary monetary policy," said Lincoln Anderson, managing director and chief investment officer at LPL Financial Services in Boston. "I don't share that concern. So far inflation reports have been quite good. But with so much uncertainty out there, it will be hard to see a big breakout in the market."

Wrapping up the week's economic calendar will be a pair of reports on Friday that will attract attention: April housing starts, forecast to dip to an annual rate of 940,000 units from March's annual pace of 947,000, and the preliminary reading for May on the consumer sentiment index from the Reuters/University of Michigan Surveys of Consumers, which is projected to slip to 62.0 from April's 62.6.

(Additional reporting by Ellis Mnyandu, Editing by Jan Paschal)

(Wall St Week Ahead runs weekly. Questions or comments on this one can be e-mailed to: jennifer.coogan(at)thomsonreuters.com)