By Nick Godt

Economic updates on retail sales as well as quarterly results from the nation's retailers are expected to be the highlights next week for a market in need of fuel to continue a two-month rally.

"I thought the market was overextended a couple of weeks ago, but it seems we can persist being overextended for a long while," said Paul Nolte, director of investments at Hinsdale Associates.

"The market can go on its merry way for a long while as long as the [economic] data is not getting worse," he said. "But if things start contradicting that view, then we could fall pretty quickly."

The market easily jumped potential hurdles over the past week, as the results of the government stress tests of major U.S. banks failed to reveal any surprises, while a series of data, including the key April jobs report, suggested the economy had stopped freefalling.

On Friday, the Dow Jones Industrial Average (DJI) rallied 164 points, or nearly 2%, to 8,574.The S&P 500 index (SPX) gained 21 points, or 2.4%, to 929, while the Nasdaq Composite (RIXF) jumped 22 points, or 1.3%, to 1,739.

For the week, the Dow gained 4.4%, the S&P 500 rose 5.9%, and the Nasdaq advanced 1.2%.

The rally since March has led the market into positive territory for the year, with the S&P now up 2.9%, and the Nasdaq up 10.3%, with on the Dow industrials trailing behind, down 2.3% year to date.

Since hitting lows in early March, the broad S&P 500 has rallied nearly 40%.

"The market has been very strong again this week but I don't know whether we might be seeing a sustainable rally," said Ken Tower, market strategist at Quantitative Analysis Services.

"Our forecast is that the market should be creating a near-term top and move back down but so far, it's not working that way," he said.

More green shoots?

After receiving a constant stream of better-than-expected economic data in recent weeks, the market next week will be looking for further signs that might fuel hopes for the economic recovery.

Trade data for March will be released on Tuesday. April retail sales will be released on Wednesday, along with March business inventories.

The April producer price index comes out in Thursday, along with the latest data on weekly jobless claims. Friday will bring the consumer price index for April, a manufacturing survey for the New York region, and the University of Michigan's preliminary reading of consumer sentiment in May.

Wal-Mart, retailers post results

Retail giant Wal-Mart (WMT) is due to reports its quarterly results on Thursday, along with Urban Outfitters (URBN), Nordstrom (JWN), Blockbuster Inc. (BBI) and Kohl's Corp. (KSS).

Among other retailers, Liz Claiborne (LIZ), Whole Foods Market (WFMI), Jack in the Box (JACK) and Macy's Inc. (M) are due to report Wednesday.

On Friday, Abercrombie & Fitch (ANF) and JC Penney (JCP) will post their results.

Also noteworthy will be results from Ambac Financial Group (ABK) on Monday, and from Applied Materials (AMAT) on Tuesday.

With 424 of S&P 500 companies having posted results so far, earnings are expected to be down 36.3% for the first quarter from the year earlier period, according to Thomson Financial.

But companies reporting have revealed some green shoots of their own: In aggregate, firms have beaten expectations by 6%, the first time Thomson's "earnings surprise" factor is in positive territory since the second quarter of 2007.

For the second quarter, pre-announcements have also improved. With the ratio of negative to positive announcements dropping to 2.0, compared with the long term average of 2.2.