TORONTO - Stock markets could be in for some further gains this week after a better feeling about the U.S. economy put investors in the mood to claw back a good sized chunk of the losses from the previous week.

The TSX ran ahead 3.11 per cent last week despite disappointing employment data for Canada and the U.S. on Friday, a turnaround from the previous week when investors were consumed by worry about the U.S. economic revival.

The headline numbers for the Canadian and U.S. employment data were terrible.

More than 43,000 jobs were lost in Canada last month, a huge miss from economists' consensus which forecast the addition of 10,000 jobs. And the unemployment rate jumped two-tenths of a point to 8.6 per cent.

And in the U.S., the Labour Department reported that 190,000 jobs were lost last month, against estimates of about 175,000, while the jobless rate came in at 10.2 per cent, up sharply from 9.8 per cent.

But investors found positive news in the American data, including the fact that the last two jobless reports weren't as bad as first appeared.

"This number is always subject to big revisions," observed John Johnston, chief strategist, the Harbour Group at RBC Dominion Securities.

"And revisions in the prior two months was favourable by 91,000. That tells me the number today probably is going to get revised over the next couple of months to show a smaller decline."

Johnston said the trend in employment numbers is moving towards improvement - a slower rate of job losses heading towards a positive reading sometime early in the New Year.

But he added that although recent reports - including data late last month showing U.S. third quarter growth of about 3.5 per cent - indicate a move into a sustained expansion, it doesn't mean there won't be some uneven patches that feel like another dip is on the way.

On a positive note, he also observed that the jobs data further reinforces the view that the U.S. Federal Reserve is not going to be raising rates any time soon.

"So I think this is a constructive development, because this means market yields are going to come down and hence, it's going to provide more support in the future for the economy so this number suggests a U-shaped recovery, which is the right way to think about it," said Johnston.

At the same time, North American markets have had a tough time holding onto gains since mid-October - last week's loss was the second weekly loss in a row and left the TSX with its first monthly loss since February.

"We've had a great run and the intermediate indicators are starting to get overbought," said Johnston.

"So we're heading into potentially a reasonable sized pullback within the context of a cyclical bull market. I think that at some point it's reasonable to take a 10 to 20 per cent pullback, which is a bit bigger than the consensus is thinking."

Johnson noted that there is still a huge amount of money on the sidelines and while "some of that could come in, it's also saying that people are still cautious."

And while Johnston believes a step back is coming, that doesn't mean we can't see further advances this week.

"We sold off through much of October and it now looks like there is a bit of a trading rally taking hold which is measured in days or a couple of weeks," he said.

"But this is not one to chase is the way I would view it. When we look at months, it suggests it's a time to be very cautious."