Wall Street Week Ahead: S&P 500 could see peak but Cyprus talks go on

By Chuck Mikolajczak and Caroline Valetkevitch

NEW YORK (Reuters) - U.S. stocks could break through to all-time closing highs this week, but it could depend on a solution to Cyprus' fiscal woes.

On Sunday, Cypriot President Nicos Anastasiades held last-minute talks with international lenders in an effort to save the island nation from financial meltdown. Cyprus faces a Monday deadline to avert a collapse of its banking system.

As talks heated up over a rescue package, Anastasiades threatened to resign in an exchange over a proposal to shut down two Cypriot banks, according to a senior official taking part in the negotiations.

While Cyprus accounts for a only a fraction of euro zone economic output, the wrangling over a 10 billion euro($13 billion) bailout package kept markets on edge throughout last week.

The S&P 500 fell last week for the first time in four weeks, with weakness linked to uncertainty overseas.

The key unresolved issues for Cyprus are how the country should raise 5.8 billion euros from its banking sector toward its financial rescue, and how to restructure the island's overgrown banks. Investors are worried about the possibility of Cyprus leaving the euro zone.

S&P 500 futures began trading lower, falling 2.1 points late Sunday before turning near flat. S&P E-mini futures were also nearly flat after briefly trading down.

Strategists said the situation could remain unresolved until Monday. "I think it's going to spill into tomorrow," said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

Even news that negotiations are ongoing, however, may be seen as positive by the market. "As long as they are talking, that will be enough to placate the market," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

Last week, investors reacted harshly to proposals by European officials to tax depositors, including those protected by depositor insurance, to fund the bailout. The tax proposals sparked some selling as investors feared such a plan could set a precedent for dealing with other troubled euro zone economies, and set off bank runs across the continent.

Assuming Cyprus' troubles are solved, investors will turn their attention to economic data due during the holiday-shortened week, with equity markets closed on Friday for the Good Friday holiday.

The U.S. data will include orders for durable goods and pending home sales for February as well as the final reading of fourth-quarter gross domestic product.

On Sunday, Italian news agency ANSA said the International Monetary Fund is planning to cut its U.S. growth forecast for this year due to higher taxes and spending cuts, citing a draft of the IMF's next World Economic Outlook report.

Stronger U.S. economic data has helped stocks rally this year, and the S&P 500 <.spx><.inx> could once again make a run at its all-time closing high of 1,565.15 this week, if the market returns to its up trend. For all of the worry about Cyprus, the S&P only dipped 0.2 percent last week and the benchmark index remains up more than 9 percent for the year.

"People are looking at a better backdrop, whether it is the jobs data, the GDP data or the consumer stepping up on the retail sales side in spite of fiscal drag," said Sandy Lincoln, chief market strategist at BMO Asset Management U.S. in Chicago.

Stocks could see another boost in the form of quarter-end "window dressing" in which money managers add outperforming stocks to their portfolios.

"You are coming into the end of the quarter, everybody has some great results. You are going to get some window dressing on some of the stocks that are doing well," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

With earnings season several weeks away, only nine S&P 500 companies are expected to report quarterly results this week, including discount retailer Dollar General Corp and video game retailer GameStop Corp .

Only a few companies released results last week, but they were disconcerting. Oracle Corp , the world's No. 3 software maker, fell well short of revenue expectations. FedEx Corp , the second-largest U.S. package delivery company, cut its forecast for the year.

According to Thomson Reuters data, of the 491 companies in the S&P 500 that have reported quarterly earnings, 69 percent have topped analysts' expectations, compared with 62 percent since 1994 and 65 percent over the past four quarters.

A strong showing this week could push the index past both its record closing high as well as its record intraday high of 1,576.09.

But the index has faced stiff resistance in prior attempts to break the mark, climbing as high as 1,563.62 before losing steam. As more attempts to break the mark fall short, the likelihood of a bigger dip that many analysts have been expecting increases.

"Every time it gets up there, it seems to sell off, so you have to get through that resistance point," Mendelsohn said.

"Once we get through that resistance point that will probably bring more buyers in. If you can't get through it, that will probably encourage some of the sellers a little bit."

(Editing by Kenneth Barry and Theodore d'Afflisio)

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