By Angela Moon
NEW YORK, Feb 7 (Reuters) - After the S&P 500's first weekly gain in a month, investors will see this week whether the U.S. stock market's rally of the last two days is the shape of better things to come - or if this year's weakness will turn into a full-fledged correction.
At Friday's close, the S&P 500 was up 0.8 percent for the week - its first weekly gain since early January. The benchmark index closed above its 14-day moving average on Friday, the first time it traded above that level since Jan. 23.
The 2.6 percent gain for Thursday and Friday marked the S&P 500's best two-day performance in four months. That rally helped Wall Street recover some ground from the latest slide, which had pushed the benchmark index down as much as 6 percent from its record closing high set on Jan. 15. Wall Street defines a stock market correction as a drop of at least 10 percent from the previous high. A bear market is a plunge of 20 percent from a previous peak.
The recent selloff created some severely oversold conditions that have "now blossomed into buy signals, but there is still a much larger intermediate-term bearishness in place," Larry McMillan, president of McMillan Analysis Corp in Morristown, New Jersey, said in a note to clients.
"The buy signals may generate a rally back to and through the 20-day moving average. But for anything more than that, the intermediate-term sell signals have to be reversed."
The S&P 500 fell 3.6 percent in January, its worst monthly percentage loss since May 2012. Its 20-day moving average is 1,804.25.
In another check of the U.S. economy's health, January retail sales will be in focus. The data could offer more evidence that the economy lost some momentum at the start of the first quarter.
On Friday, nonfarm payrolls data showed job creation in the United States slowed sharply over the past two months, raising the prospect that the economy may be losing strength.
Federal Reserve Chair Janet Yellen will be in the spotlight this week as she testifies before U.S. lawmakers in her first public comments on monetary policy and the economy after taking the reins at the U.S. central bank. She will appear before the House Financial Services Committee on Tuesday and the Senate Banking Committee on Thursday.
Yellen, a strong supporter of the Fed's easy-money policies, will be responsible for ramping down a huge bond-buying program and, later, raising interest rates and shrinking the Fed's swollen balance sheet.
The Commerce Department is expected to report on Thursday that retail sales were flat in January, held down by a drop in receipts at auto dealerships, after gaining 0.2 percent in December. Even after stripping out autos, retail sales are seen barely rising.
"That retail number is actually important because it includes the January gift card numbers, so that completes the Christmas picture," said Phil Orlando, chief equity market strategist at Federated Investors, in New York.
Last week, a group of nine retailers that report comparable monthly sales posted a 3.6 percent rise for January, below the 4.9 percent pace a year earlier, according to Thomson Reuters. The data suggested that January was a tough end to the most competitive holiday season for U.S. retailers since the 2007-2009 recession.
This week's economic calendar includes jobless claims on Thursday and January's industrial output on Friday. The preliminary February reading on consumer sentiment will also be released on Friday by Thomson Reuters and the University of Michigan.
On Monday, McDonald's Corp will report January sales. Last month, the company reported weaker-than-expected quarterly sales at established restaurants as fewer diners frequented the fast-food chain. McDonald's warned that sales would again fall short of analysts' expectations in January.
On the earnings front, quarterly results will be released this week by Sprint Corp, Cisco Systems Inc, Deere & Co, PepsiCo Inc and MetLife Inc.
Thomson Reuters data showed that of the 343 companies in the S&P 500 that had reported earnings through Friday morning, 67.9 percent have topped Wall Street's expectations, slightly above the 67 percent beat rate for the past four quarters and ahead of the 63 percent rate since 1994.
Wall St Week Ahead runs every Sunday. Questions or comments on this column can be e-mailed to: angela.moonatthomsonreuters.com