By Caroline Valetkevitch
NEW YORK (Reuters) - The guessing game about when the Federal Reserve will start to cut its stimulus will enter a new round next week as stock investors dissect minutes from the last central bank meeting, while retail sales and clues about the consumer will also vie for attention.
The sales data will be watched for signals ahead of a holiday shopping season that is not expected to be particularly robust. Results from several top retailers including Home Depot (HD) and Best Buy (BBY), which is among the S&P 500's top percentage gainers this year, also are due next week.
But the question of when the Fed will slow its bond buys has been one of the biggest influences on the market lately.
Investors have been bracing for anything that could reverse at the last minute the market's year-long rally, which saw the Dow and S&P 500 hit record highs again this week. The S&P 500 is up 26 percent this year and registered a sixth week of gains on Friday.
Fed Vice Chair Janet Yellen, at her confirmation hearing to succeed Chairman Ben Bernanke, suggested any change to the Fed's accommodative policies was not imminent. That lifted stocks, since investors had speculated the Fed could reduce its bond-buying as early as December after robust data on U.S. payrolls and economic growth.
As part of its quantitative easing, adopted more than four years ago, the Fed has been buying Treasuries and other bonds to keep interest rates low and promote growth.
Continued stimulus and ultra-low interest rates have been a big part of the market's advance this year. While any change in that support is expected to be small at first, speculation over its start has caused much market turmoil.
"I'd be looking at those minutes for evidence that they're considering reducing the threshold for raising rates, and I would view that as a hint that they're considering restarting the tapering process," said Barry Knapp, managing director of equity research at Barclays Capital in New York.
The minutes released Wednesday will be from the Fed's October 29-30 meeting. Stocks fell after that Fed announcement, which removed a phrase expressing worries about credit conditions. Some investors interpreted that as a sign the Fed could begin tapering earlier than expected.
Knapp said at this point he doesn't see any tapering by the Fed until next year, but, he said, "We're marching toward an inevitable start to this process."
Retail sales data for October, also due Wednesday, could keep investors on edge given last month's partial U.S. government shutdown, which could affect the coming holiday shopping season.
An earnings report from Macy's (NYS:M) this week "was big," said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago. "What people were worried about was the holiday. And now people are saying, 'Well, maybe the holiday is going to be OK.'"
Companies like J.C. Penney aside, consumer discretionary shares have led S&P 500 gains this year and are among the priciest in the index. The sector has a forward price-to-earnings ratio of about 18 while the P/E for the S&P 500 is 15, according to Thomson Reuters StarMine data.
Next week also brings data on consumer and wholesale inflation.
KEY LEVELS AHEAD
If the rally goes on, indexes could soon be bumping up against some significant levels, at least psychologically: the Dow is nearing 16,000, while the S&P is just below 1,800 and the Nasdaq a little shy of 4,000.
Analysts say, barring a big surprise from the Fed or the U.S. government, indexes look likely to stay on their upward trend for now.
In addition, some investors could be on the sidelines waiting for an opportunity to come into the market, said Todd Salamone, director of research at Schaeffer's Investment Research. Some gains could come as a result of short-covering.
"Those playing on the short side of the market ... are experiencing serious pain. And therefore, when they're in a losing position, those are candidates for short-covering."
(Reporting by Caroline Valetkevitch, additional reporting by Luke Swiderski; Editing by Nick Zieminski)