Stocks may begin suffering from rally fatigue

The stock market is looking winded from its three-month race upward.

After a quick bounce off 12-year lows in early March, Wall Street is having a harder time carving advances as investors await definitive signs of a break in the recession.

The benchmark Standard & Poor's 500 index rose 5.3% in May, but that was less than its 9.4% surge in April.

Traders have been buying stocks on kernels of economic data and corporate earnings reports that indicate the economy's slide could be slowing. But some analysts say investors might be getting ahead of themselves.

"A turning point in sentiment indicators is not a turning point in real indicators," said Bruno Cavalier, lead economic analyst at Oddo Securities in Paris. "We remain quite cautious about the global outlook."

It's normal for the market to move before the economy does, but traders also risk stepping into the market too early. In downturns over the last 60 years, the S&P 500 index has hit bottom an average of four months before a recession ended and about nine months before unemployment hit its peak.

Wall Street could be in for a more difficult climb as it waits for the economy to catch up with investor expectations, some analysts say. The S&P 500 index already has shot up 35.9% since March 9, a run that might normally take years to occur.

The coming week's full calendar of economic readings could help steer the market. Lately, there has not been enough good news to persuade cautious investors to buy. Traders are often simply shifting money around to capitalize on the market's gyrations, analysts say.

"There's no new money coming into equity funds," said Joe Saluzzi, co-head of equity trading at Themis Trading in Chatham, N.J. He sees little to celebrate in the economy, pointing to General Motors Corp.'s expected bankruptcy filing. "There's nothing good out there."

As the spring rally progressed through its first two months, economic readings that looked a little better than the market's grim forecasts incited heavy buying. Now, though, the snapshots of the economy are likely to be more mixed and could lead to more volatility.

"Some investors have come to expect better-than-expected economic data, and that does make the market a little more vulnerable, obviously much more so than back in March," said Todd Salamone, senior vice president of research at Schaeffer's Investment Research Inc. in Cincinnati.