After a 34% sprint since March, the market looks like it might finally be taking a breath. It traded sideways for most of last week, but still managed to post its 12th weekly gain in the last 14 weeks. In fact, after briefly pushing into positive territory for the year during a number of trading sessions over the last two weeks, the Dow finally closed in the green for the year on Friday. For the week ended June 12:

S&P 500: Up 0.65% to 946.21
Dow: Up 0.41% to 8,799.26
Nasdaq: Up 0.51% to 1,858.80

Take stock in this
Remember how I told you to watch the Treasury auctions last week? Well, interest rates were the talk of the Street. Government bond auction results drove the markets for much of the week. Everyone seemed to freak out when an auction for the 10-year note got a tepid response, driving the yield to 4% and putting more upward pressure on mortgage rates. But then they breathed a sigh of relief when the 30-year auction went relatively well.

Aside from bonds, oil stocks continued to gush higher for most of the week, as crude oil hung in the $70 range throughout the week, settling at $72.04 a barrel on Friday. The basic materials and technology sectors have had some big movers since the market's March lows, but they didn't turn in a good performance in Friday's session. When top performers take a break, the overall market often follows suit, so I wouldn't be surprised to see the rally take a time-out until those sectors bounce back.

Are the bulls really back?
There have been some glimmers of economic hope in weeks past. But how far can "green shoots" take this rally? These green shoots are going to need a lot of sun and nursing before they flower. And we need flowers before the bull can knock down the bear for good.

Meanwhile, we're still dealing with a nasty trend right now: Businesses are cutting jobs and wages because demand is down. Jobless consumers don't have money to spend, spurring less demand; so businesses must cut spending again, and the cycle repeats. It's a self-feeding downward spiral.

To break the cycle, someone has to spend to spur recovery. It doesn't look like consumers or businesses will start spending any time soon. Even though consumer sentiment reached a nine-month high on Friday, unemployment is still rising, and wages aren't likely to see big gains anytime soon. Credit is tight, and consumers' habits are changing -- they're saving more, trying to pay down debt and getting used to sale prices.

That leaves the government. The government has already stepped up as the spender of last resort, but how long can it keep up the pace without wreaking even more havoc?

Well, part of that havoc may be the rally itself. One theory floating around as to why the market has surged 34% since March is that the government has already injected so much cash into the economy at such a rapid rate that businesses haven't had time to put that cash to work. All that liquidity is finding its way into the financial markets, boosting prices. Some are even whispering that a "bailout bubble" is forming.

To all you bulls out there, the big question is: What fuels a further advance? You'd like to see a big and positive catalyst, but what's left? Future earnings still look weak, while rising stock prices are making the market's multiple rise. Stocks aren't bargain-basement cheap any more. By the looks of it, we could be facing slow or no growth for the next several years, with tons of liquidity that could fuel inflation. That's the perfect recipe for stagflation -- and not a very rosy scenario for the bulls.

In company news ...
Some quick hits:

  • The government gave the all-clear for 10 of the nation's largest banks, including JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS), and BB&T (NYSE:BBT), to pay back their "scarlet-lettered" TARP money.
  • Procter & Gamble (NYSE:PG) will bring a new CEO on board. Current COO Robert McDonald will replace longtime CEO A.G. Lafley, who will remain chairman.
  • According to The Wall Street Journal, PC-maker Dell (NASDAQ:DELL) is in the market for a "significant-sized company" to acquire in the near future.
  • Money management firm Blackrock (NYSE:BLK) said it would buy Barclays' (NYSE:BCS) Global Investors unit for $13.5 billion, creating what will become the world's largest money manager with an estimated $2.7 trillion in assets under management.

What to focus on this week
On the economic front, data on producer and consumer prices for May are due out on Tuesday and Wednesday, respectively. With investors hunting for any hint of inflation, these will be key numbers to watch.

Also, remember that stock markets don't move in a vacuum. Bond yields remain important, and the credit and currency markets have the potential to be major drivers for stock prices, especially now, as the markets seek direction.

For related Foolishness:

Jennifer Schonberger does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Procter & Gamble, which is a Motley Fool Income Investor selection. Dell is a Motley Fool Inside Value pick. The Fool has a disclosure policy.