Here's to a better second half. We could use it.

You've heard the superlatives. The market has had its worst first half since 1970. Think men on the moon and bell bottoms, and GM shares trading higher than they are now. Ouch.

The Dow lost 14.4 percent; the S&P lost 12.8 percent and Nasdaq lost 13.5 percent so far this year. Dare we say it couldn't get much worse.

The second half looks to be more of the same but many strategists still think stocks will end the year higher. Just find a way to navigate those twin terrors of the credit crunch and rising oil prices.

Let's look first at the year's winners. Of course, one of the best - energy stocks, up 8 percent for the first half (17 percent for the quarter) and technology stocks, up 13 percent for the year but 2.3 percent for the quarter. Oil services were a big winner in the energy sector, up 17 percent for the year. Gold stocks in that period are up 13 percent.

Losers? You guessed it. The financial sector was the worst. It washed out with a 30 percent loss for the year so far, and it's still heading lower.

Wall Street's bears have a serious grip on the stock market, a hold that can only add to volatility in the week ahead.

The Dow escaped closing in bear market territory Friday by a hair, finishing the week at 11,346, a 4.19 percent decline for the week and a 19.89 percent decline from its October high.

In the coming holiday-shortened week, there is some key data, including the June employment report, monthly auto sales and a European Central Bank rate meeting. The fourth of July three-day weekend starts just four days after the end of the quarter Monday. Traders say the quarter-end has added to the turmoil in financial markets as big investors shut their books on the first half of a very tough year.

The Dow did dip for a short period Friday into the bear zone, defined as a 20 percent decline from its October high. It briefly touched a level of 11,331—20 percent beneath the all-time high of 14,164, reached Oct. 9.

Stocks are on track for the worst first half since 1970, and the Dow is so far turning in its worst monthly performance since Sept. 2002. As of now, it is also finishing its worst month of June since 1930.

Nasdaq ended the week at 2,315, off 3.76 percent, and off 19 percent from its October high. The S&P 500 was off 3 percent at 1278, 18.3 percent from its October high. S&P 500, as traders have told us, on a course to test the January lows and it is nearly there. The intraday low in January was 1270, and on Friday, the S&P dipped to 1272.

The S&P financial sector lost 6.6 percent in the past week, taking it to a 17.25 percent drop for the quarter so far. The best performer for the quarter is the energy sector, up 3.65 percent and currently the only S&P sector in positive territory.

Econorama

Oil will also be a factor in the coming week, capable of putting a strangle hold on stocks if it continues to move higher. On the other hand, a decline could open the door for buying in stocks. Oil finished the week up $4.85 per barrel, or 3.6 percent, to a record $140.21.

"I personally think one of the most important set of numbers next week are the vehicle sales numbers because they go directly to GDP," said Deutsche Bank chief U.S. economist Joseph LaVorgna. J.D. Powers sees the market for light vehicles contracting 15.4 percent in the month of June, compared to a year ago, with the U.S. auto makers reporting the worst declines when their numbers are released Tuesday. J.D. Powers predicts a 26 percent decline for GM and a 31.4 percent decline for Ford.

"I don't think the market will move on it that much because it's a weakish kind of number is expected. But I think you're really going to get a story of weak consumer spending," he said.

LaVorgna said he 's also watching the ISM data, reported Tuesday and the Thursday morning jobs data. He lowered his forecast for June non farm payrolls to a reduction of 100,000 from a loss of 75,000. He expects the floods in the Midwest to have been a drag on hiring. He said he expects the unemployment rate to be 5.5 percent, higher than expected and the same as last month.

Other data includes Chicago Purchasing managers data, reported at 9:45 a.m. Monday, the last key report before the quarter end.

Other items to watch include Tuesday's construction spending. The ADP employment report is released Wednesday, as are factory orders for May. On Thursday, weekly jobless claims are reported as usual, along with the employment report at 8:30 a.m. At 10 a.m Thursday, ISM non-manufacturing data is released. Thursday is also when the Fed will report on the value of the Bear Stearns portfolio that guarantees the more than $28 billion in loans for Bear Stearns.

Dollar - Winner or Loser?

Another big event traders are watching in the week ahead is the European Central Banks' rate decision Thursday. LaVorgna said the language will be key. The dollar fell 1.03 percent against the euro in the past week, trading Friday at $1.5790 per euro.

I talked to traders in Chicago's pits about the dollar while I was visiting there Thursday and Friday, and they are all watching the ECB decision with an eye toward dollar—and oil—impact.

The ECB is widely expected to hike rates, a move that is seen as dollar negative.

Kevin Ferry of Cronus Futures Management says a case can be made where the ECB does not hike rates because it is worried about the Euro zone's weaker economies. He also said if there is a rate hike, it may not generate the pop in the euro you might expect. "Global speculators might feel you should sell the currency because of the growth prospects," he said.

If it doesn't cut rates, the ECB stands to lose face and could set off a surge in prices. The swirl of speculation about dollar intervention could certainly come back into o the markets.

Ferry says he doubts there would be intervention but interestingly he said it might be more effective now than in the past because of the electronic marketplace. Previously traders could sit out and then rush back in after the intervention. Electronic trading might be able to make a bigger, faster directional impact.

Food vs. Fuel

Monday's USDA crop report is being closely watched by traders and farmers for clues to the impact of the Midwest floods. Matt Scharl is a trader in the S&P futures pit, but he's also a farmer with a small hundred acre tract in Michigan, planted with corn. "I was going to sell some (corn) futures ahead if this report," he said Thursday. While his farm is far away from the flood area, he suspects the report does not show as much damage to the crop as feared.

Carol Hurley, who trades grains at the CME, said she believes the report will probably not show the total picture of the floods' impact. That may not show up until the August crop report, she said.

Earnings Central

There are just a few earnings reports this week.H&R Block reports Monday. Constellation Brands and Apollo Group report Tuesday, and Family Dollar releases its numbers Wednesday.

(Correction: I incorrectly reported that Yahoo's shareholders meeting is this week. )

Aug. 1 is the day Yahoo shareholders consider investor Carl Icahn's slate of directors.

Questions? Comments? marketinsider@cnbc.com

Stocks could continue to let off steam at the open Friday.

The perfect storm of credit worries, weak data, a record rise in oil and a weakening dollar combined to spin stocks into a downward spiral Thursday. The S&P 500 broke through the key 1300 psychological level, ending the day at 1283, down 2.94 percent. The Dow was off 358 at 11,453, a 3 percent decline, and the Nasdaq was off 79 points or 3.3 percent.

I spent the day walking the floors of the Chicago Board of Options Exchange and the CME. Fitting the fall in the market, there was a pervasive bearishness among traders.

Traders say the markets are under pressure ahead of the end of the quarter Monday, and before the holiday shortened fourth of July week. Oil is adding to the worry. It rose $5.09 per barrel to $139.64, a 3.8 percent jump. The dollar was down 0.55 percent to $1.5764 per euro.

"There's just nothing but bad news. We need good news. Traders are dying," said Doug Prskalo of Blue Capital Group. Prskalo trades S&P 500 options.

The prospect of more big writedowns at banks and a consumer, hampered by poor housing and now high energy prices and inflation, is a bad brew for markets.

What's the Upside?

On a short horizon, Prskalo said the market may stay neutral or down Friday. "we could bounce Monday. If we don't' bounce Monday, we're going to be in for trouble," he said.

CNBC's Rick Santelli, who reports from the CME Group, said the end of the quarter/end of half year trade might actually create a buying opportunity. Friday will determine whether this is the first weekly close below the March lows, just before the Bear Stearns bailout. If it does close at that level, it will be viewed as a technical buying zone.

Econorama

Friday's data includes personal income and spending at 8:30 a.m. There is inflation data in that report, in the form of the PCE deflator, an indicator closely watched by the Fed. University of Michigan consumer sentiment is at 10 a.m.

Testing Lows?

"I think we're going to see some pretty decent fluctuations up and down near term. My personal opinion is we're going to see a long grind down," said Patrick Kernen, a managing partner with Cardinal Capital.

"We could test the lows of January, right down to 1250" (on the S&P), said Kernen, who trades options on the S&P 500 at the CBOE. His time frame for that would be the next month and a half. "If we get down there, I think we'll see that panic and for me, personally, that's where I'd get long the market."

Prskalo said the S&P could test 1250 and dip as far down as 1230 before a rebound.

Dart Options' managing partner Tim Feeney said the market is getting closer to the bottom of his range. Trading Thursday was not panicked. "It was an orderly sort of progression down," but like others, he sees a period of sloppiness for the market. Feeney trades S&P 500 options as well.

No History as A Guide

Richard Berg of Performance Trust trades mortgages and credit derivatives. He sees a lack of liquidity across the markets. I ran into him at the CME just after his appearance on "Power Lunch." He said a confluence of factors are disturbing, including record high oil prices.

"Every professional here, if they admitted it out loud, would say 'I have no advantage because we are in such uncharted territory. Someone without knowledge might even be at an advantage,'" he said.

He said traders use history to guide them and this market doesn't fit anything in their experience.

Berg said the markets are also being impacted by the unwillingness of the big firms to take on risk and get on the other side of certain trades in stocks, derivatives and bonds, and that is adding to volatility.

Paul Carbonara, who trades S&P 500 futures, said he thinks the market will trade in a volatile up and down pattern, as buyers come out on the dips. But he also says it would be surprising if the market seeks to retest January lows.

Questions? Comments? marketinsider@cnbc.com

Now that the Fed's June meeting is out of the way, the focus on economic data will intensify as investors try to find a road map for the markets.

There are a few economic headlines expected Thursday. Weekly jobless claims are at 8:30 am New York time as is first quarter real GDP. Existing home sales for May are released at 10 am.

The direction of oil and the dollar will also factor in. Two disappointing after the bell tech earnings reports could pressure Nasdaq.

Research in Motion earnings of $482.5 million and $2.24 billion in revenues were double, but the company missed analysts' estimates by a penny. The company also put its current quarter earnings at the low end of analysts' range and said it would increase spending to support new products. RIM's stock was punished in the after hours. Remember, there had been a lot of bullish street talk from analysts going into this report.

Oracle's net rose to $2.04 billion from $1.6 billion, but it too talked down expectations and its stock sold off.

Dow a Dud

The stock market initially moved higher after the Fed announced it was leaving rates unchanged Wednesday afternoon. In its statement, the Fed showed increased concern about inflation. The Dow finished up just 4 points to 11,811 after a triple digit rally fizzled, while the Nasdaq finished up 32 points or 1.2 percent. The S&P 500 was up 7 points or 0.5 percent. Oil moved off its lows after the Fed decision, finishing the day down $2.45 at $134.55 per barrel. The dollar was off 0.67 against the euro at $1.5676.

Market activity Wednesday revolves around the Fed, and the dollar hangs in the balance.

The Federal Open Market Committee winds down a two-day meeting and is expected to release its statement at 2:15 p.m. The Fed is widely expected to leave rates unchanged but make comments that show it is concerned about the weak economy and inflation. The question is just how hawkish on inflation will it be, and how much will the Fed tilt toward an ultimate change in its bias to a tightening mode.

Keep in mind, the Fed's statement comes after European Central Bank President Jean-Claude Trichet testifies before the European Parliament on the euro zone economy Wednesday. If he keeps to form, Trichet will talk about tackling European inflation and possibly make some dollar crushing comments.

Fed Chairman Ben Bernanke has put his own stake in the ground on the dollar and for that reason it will be interesting to see just what the Fed has to say about inflation. Remember on June 3, Bernanke said dollar weakness is contributing to an unwelcome increase in import prices and consumer price inflation. He also said the Fed is monitoring developments in currency markets, side-by-side with Treasury.

In a note, Miller Tabak's Tony Crescenzi said the action at Tuesday's Treasury auction may be a sign that investors are backing away from the recent view that the Fed will be raising rates in the near future. He said the strong demand for the $30 billion in two-year notes was the best since last October. The auction yield was 2.922 percent, well below expectations and a sign that there's strong demand for the issue, he says.

Crescenzi says he expects the Fed to place more weight on the fragile economy and financial system than on inflation for the time being.

The Dow Tuesday finished off 34 at 11,807 and the S&P 500 was up 3.71 points at 1,314.29. The Nasdaq, for a second day, made the biggest move, falling 17.46 points to 2,368. The dollar fell 0.31 percent against the euro, taking it to $1.5572 per euro. Year-to-date, it is down 6.25 percent.

The two-year finished with a yield of 2.842 percent.

Boiling Oil

Oil inventory data is reported at 10:35 a.m. Platts expects to see a draw down of 1.7 million barrels of crude and 750,000 barrels of gasoline. But it expects distillates stocks to be up 1.7 million barrels when the Energy Information Administration and American Petroleum Institute release weekly data.

Nymex crude finished a relatively quiet session Tuesday at $137, up $0.26 per barrel.

Drilling for Speculators

While the issue of offshore drilling is brewing on the sidelines, Congress continues to dig into whether speculators in the oil markets are causing sky high prices.

On Wednesday, the Joint Economic Committee takes on the question of whether oil is in a bubble or a new reality. Cambridge Energy Research Chairman Dan Yergin leads off the testimony.

"There's two meanings for speculators," Yergin told me. "There's the technical term. That's the people who provide liquidity and enable people like natural gas producers and farmers to hedge their risk. Then there's the colloquial meaning that ranges from manipulator to risk taker to bubble maker."

Yergin said he is being asked to discuss the influence of financial markets on the price of oil. "Obviously, the financial markets play a much bigger role than they used to. There's a "shortage" psychology in the financial markets, based both upon current market conditions and expectations of a long term shortage," said Yergin, who is CNBC's global energy analyst.

Here's something to consider as well. Dow Jones reported Tuesday that China's diesel imports in May were 34 times greater than a year ago, and for the first time in two years, some of that came from the U.S.

Econorama

There is some economic data due Wednesday. Durable goods are reported at 8:30 a.m., and new home sales for May will be released at 10 a.m.

RIM Shot

Wednesday is an interesting day for earnings. The most widely anticipated appears to be Research in Motion, which has has no fewer than a half dozen analysts in the past week making favorable comments ahead of the earnings report. The latest one was RBC Tuesday, which raised its price target to $165 from $150. RBC is not alone in expecting above consensus results. Analysts expect earnings per share of $0.85.

Strategas Research analysts today say the stock market looks oversold and could be setting up for a short-term rally.

In a note today, the firm looked at the record level of short interest and other factors. Last week, the percent of short interest on the NYSE was at 4.2 percent, an all time high.

"We typically look at short interest as a contrarian indicator. We said the record level of short interest that we're seeing now at one time could be explained by the amount of hedge funds, but since hedge fund assets recently plateaued and made a top, we just think this is a very bearish sentiment which is a contrarian sign," said Chris Verrone, an analyst at Strategas.

Verrone says that Strategas Research's own proprietary market sentiment index is now at levels last seen in April, and it is pointing to an oversold condition. "It's at a level right now that we traditionally associate with a buy signal. It's one of the reasons we see a rally in the next two to three months," Verrone said.

"For the most part, the economic data has been bad, not awful. We think in the next three months there could be room to run, but we remain pretty bearish in the next 12 to 18 months because we think we pay for a lot of the stimulus in '09, and we think we set up for a more traditional cyclical slow down the second half of '09," he said.

Verrone says you can't put an exact time frame on when the market could make a move but it looks like it's getting ready. On the horizon is the end of the quarter Monday, and then earnings season gets underway the following week.

Strategas says it's not surprising that the most negative sentiment is among the market's highest beta sectors - financials and consumer discretionary. "For those with long-term time horizons, it's hard not to be bearish on these two sectors. Still, the current short interest data suggest that the trade is presently over-owned," the firm says in its note.

Check out those financials today. They are showing some signs of life after days of selling. the S&P financial sector was up more than 2 percent at midday. Stocks like Bank of America, American Express, Goldman Sachs,JP Morgan and Citigroupare all up two percent or more. Lehman is more than 5 percent higher. Watch it though. One trader cautions we're seeing some end of quarter trades, and sellers are looking for any sign of strength to make their move.

Questions? Comments? marketinsider@cnbc.com

United Parcel Services' after the bell earnings warning and the continued meltdown in financial stocks are casting a negative tone on the market ahead of Tuesday's open. But stocks are also somewhat stuck in a holding pattern ahead of Wednesday's Fed news.

Oil, too, has kept the pressure on stocks, continuing its unrelenting move higher, even after Saudi Arabia promised over the weekend to turn on the spigot. Disruptions in Nigeria lifted crude $1.38 per barrel to $137.85.

UPS followed rival FedEx and reduced its profit forecast for the second quarter. Its stock fell after it cut its outlook, saying that the unprecedented increase in fuel costs and the slow economy hurt profits. UPS said it is seeing lower than expected package volume and an accelerating decline in the use of premium air products. It also said it is now seeing the "anemic" U.S. economy negatively impacting package volumes coming into the U.S.

Art Hogan, managing director at Jefferies, says we'll see more earnings negatives related to oil. "I think anybody that uses any sort of energy in any significant way" will show an impact, he told me. "FedEx is the tip of the iceberg," he said (ironically, he made that comment less than an hour before the UPS news)

Two key stock indexes barely budged Monday, with the Dow down 0.33 points at 11,842 and the S&P up 0.07 at 1318. But the Nasdaq was down 20 at 2385, and the S&P financial sector was down 2.7 percent, continuing last week's decline on concerns about more losses and writedowns.

The dollar gained close to 0.7 percent against the euro, and Treasurys sold off, lifting yields. The 10-year was yielding 4.168 percent. Gold moved lower as the dollar rose, losing $16.50 per troy ounce or 1.8 percent to $884.80.

Fed on Hold

The Federal Open Market Committee starts its two-day meeting Tuesday. It is not expected to move on rates, but it is expected to talk tough on inflation and there's some speculation it will indicate a clear inclination toward raising rates when it issues a statement Wednesday afternoon.

Earlier this month, Fed Chairman Ben Bernanke indicated the Fed is unhappy about the weakness of the dollar and said it's monitoring the situation.

"We're in a wait and see mode for something that's very predictable. It's difficult to trade this market and get excited about it," said Hogan of Wednesday's Fed statement.

Econorama

Also expected Tuesday is the S&P Case Shiller Home price index, released at 9 a.m. Consumer confidence is reported at 10 a.m.

"In terms of economic data ... it's going to be really hard to move the needle unless it speaks to inflation," said Hogan. He said he is watching the Thursday's first quarter GDP report for that reason, as it includes a price component. He is also watching Friday's personal income and spending data for the same reason.

Earnings Central

There is some earnings news expected Tuesday with reports due from Kroger ahead of the opening, and Darden Restaurants and Jabil Circuits after the bell.

Goldman Sachs is doing an about face on its May call to buy financial and consumer stocks.

In a note this morning, the firm's strategists said sell financials and consumer discretionary shares and continue to overweight energy and materials. (The contrarian view: The case for consumer discretionary .)

Portfolio strategist David Kostin and four other analysts also are overweighting tech but are neutral on everything else. In May, they had moved to overweight consumer shares and neutral weight on financials.

What happened?

The strategists say they had expected a tactical uptrend in the market. They said they had expected fiscal stimulus and bank recapitalizations to boost consumer and financial shares.

"Our theory was clearly wrong in hindsight: Financials slumped 18 percent and consumer discretionary fell 7 percent while S&P 500 fell 5 percent. We are now back-tracking and again suggest an underweight in both sectors," they wrote.

Inflation is one culprit. So is the weak consumer.

Goldman's commodities research forecasts average 2008 prices for energy, industrial and agricultural materials will be 50 percent above 2007 averages. During periods of rising producer price "crude materials" inflation, operating margins fall, multiples shrink and there are low equity returns. The analysts said in past similar periods, telecoms and financials were the worst performers, and energy and materials posted high returns.

Fear of Financials

Goldman financial sector analysts last week issued a report saying a turnaround in financials is not imminent; credit deterioration will not peak until 2009 and that capital raising is getting harder. The strategists said the financials are 15.1 percent of the equity cap of the S&P 500 and they recommend now underweighting to 13 percent.

Consumer discretionary stocks are 8.4 percent of the S&P, and they recommend weighting at 7 percent.

Goldman has recommended overweighting energy for four years. They recommend a 17 percent weight vs. 14.3 percent for the S&P and for materials they are at 4 percent vs. 3.9 percent.

In technology, they recommend an 18 percent weight vs. the S&P's 16.7 percent. "In terms of the key macro themes in the market -- inflation, consumer weakness, global growth and fiscal stimulus -- technology benefits from continued growth outside the US and it has historically outperformed in high raw materials inflation environments because its margins have been less sensitive to these input costs," they wrote.

Energy Earnings

Like other strategists, Goldman's analysts warn that earnings estimates are too optimistic for the most part. But one area where earnings are not expected to be cut are the energy and materials sectors. They note that during the year, analysts have actually revised energy estimates upward by 13 percent.

Oil: The Wild Card

JP Morgan today issued a note on what stocks might do in three scenarios for oil prices .

-If oil remains in its current range, they say 25 years of daily trading data show that financials would be a place to be. They say financials fell 63 percent of the time when oil rose. Financial stocks though outperformed the S&P after each period. (JP Morgan strategists recommend being long financials.)

-If oil rises $30 per barrel, obviously energy stocks and materials are the clear winners

-If it falls $30, airlines and financials are buys.

JP Morgan's note was based on the findings from its Quant Research department which produced a global oil correlation model that analyzed 2,700 stocks.

Questions? Comments? marketinsider@cnbc.com

Stocks will struggle in the week ahead as they face the multiple threats of record oil prices, higher interest rates, a weak housing picture, and the fragile financial sector.

The big news event will be the Fed's two day meeting, which is not expected to result in any rate action when it ends Wednesday afternoon. But it's likely the Fed will crank up its rhetoric on inflation and possibly send signals about whether it is getting ready to move toward tightening. Traders say too much emphasis on a bias change toward raising rates could hurt stocks, especially the battered banks.

Oil too will be a factor, and the meeting in Jeddah, Saudi Arabia of oil producers and consumers this weekend could generate some important news for energy markets. The Saudis are expected to announce production increases, but traders are watching for other developments as well.

There is a series of important data releases on housing, consumer attitudes and manufacturing in the coming week. There are several earnings reports of note, including tech darling Research in Motion , and beaten down homebuilders KB Home and Lennar .

Wall Street is braced for a wave of negative comments on corporate earnings as the second quarter winds down. This past week, banks took the brunt of selling amid a barrage of negative news on that sector. Analysts cut estimates and issued new warnings about writedowns and dividend cuts. "You can't fight this credit story right now...You get the brokers cutting the big banks. You've got the the brokers cutting the brokers," said one trader.

Financials were down 4.7 percent in a week that saw the Dow lose 3.7 percent and the S&P 500, 3.1 percent. Nasdaq was down nearly 2 percent. The Dow closed at 11,842, its first close below 12,000 since March. There's certainly a growing dark mood among traders that only worsened Friday afternoon when S&P put the U.S. automakers on credit watch and Ford's restructuring news showed just how dire the impact of high gasoline prices has been for the struggling auto sector.

No Summer Fun?

"The next few months are going to be challenging," said Citigroup chief strategist Tobias Levkovich. "...Companies will have to indicate that it's not as good as it was, not that it's terrible."

"I don't think people understand the relationship between the credit markets and business activity," he said. Levkovich said the credit crunch, which began last summer, has had a lagging impact on some parts of the economy. Banks, we saw, were the first to feel the pain. "We're just about to hear companies in the industrial space telling you things are tough...That's one thing I worry about a lot because I don't think investors are prepared for this."

Global growth has helped pad the earnings of some of these companies but now that is beginning to slow down, particularly as you look at Europe. Levkovich has told us that he sees a W shaped downtrend for the economy. "We're inflecting into the next V of the W," he said.

"Earnings estimates are too high but once they get reasonable, we may rally again," he said. Levkovich said he believes though that stocks will end the year higher after this current rocky period. The sectors he likes are financials and retailers. Financials, he says, have already been oversold.

We checked in with Art Cashin late Friday for his latest technical target on the S&P. "People were wondering and worrying about 1310 on the S and P. That is the bottom of an interim downtrend line. If that were to break, it would almost assure a test of the St. Patrick's Day lows," said Cashin, who is the director of floor operations for UBS. Cashin said the VIX does not reflect the high anxiety seen in stocks right now, and the market needs to wash out in a sell off with some heavy volume behind it.

Fed Ahead

The Fed is not expected to move on the 2 percent target Fed funds rate, but it is expected to include hawkish comments about inflation when it releases its statement Wednesday. The market is pricing in a quarter point increase at the October meeting.

"The Fed will continue to its more hawkish tone in its statement, but not move until we get onto firmer economic ground. Recent signs of somewhat better economic conditions are a bit of a head fake, as it is more in response to tax rebates than improving fundamentals. That said, the hawks (largely Regional Fed Presidents) are gaining power, which means we will also see dissents," Mesirow Financial chief economist Diane Swonk wrote to us.

Mark Zandi, chief economist with Moody's Economy.com also agrees the Fed will not act and he does not expect them to start hiking rates until early next year. "It will be clear from the statement that they lean toward tightening because of inflation risks," said Zandi.

He said he believes the Fed is doing the right thing. "I think the house price declines start to abate late this year and early next. It feels like we're in some type of cathartic process right now. I think this process has to go through Arizona, Florida and some Northeast markets. I think he worst will be over by this time next year, by spring, and that will be the clear signal for the Fed to raise rates," he said.

"The irony is what's driving inflation fear is oil and what's driving oil is house price declines. It's creating so much angst in the financial system that investors just go to commodities" for returns instead of stocks and other instruments, he said.

Boiling Oil

At the meeting of oil producers and consumers Jeddah, the Saudis are expected to announce an increase in production. The Saudi oil minister confirmed that the kingdom will raise crude output to 9.7 million barrels per day in July, which would be 500,00 barrels above May's level. They may also talk about improving production and refining operations, traders say. Oil finished the week at $134.62 per barrel.

Oil inventory data is released Wednesday at 10:35 a.m.

Econorama

On the housing front, the Case Shiller home price index is reported Tuesday; new home sales are Wednesday and existing home sales are Thursday. Consumer confidence is released Tuesday and consumer sentiment is reported Friday. Durable goods orders for May are released Wednesday, and final fist quarter GDP is Thursday. Personal consumption and spending data is released Friday.

Earnings Central

Techs, retailers and homebuilders are among the handful of companies reporting in the week ahead. Research in Motion and Oracle report after the bell Wednesday. Retailers reporting include Walgreen on Monday; Kroger on Tuesday; Bed Bath and Beyond Wednesday, and Rite Aid on Thursday. Lennar reports Thursday and KB Home reports Friday.

In other corporate news, we'll be on the watch for news from Anheuser-Busch on its consideration of InBev's takeover bid. CSX Wednesday holds its shareholder's meeting, where a hedge fund is vying for board seats. Washington Mutual shareholders are set to vote Tuesday on TPG's $7 billion investment in WaMu.

- Questions? Comments? marketinsider@cnbc.com

A blast of negativity surrounds the financials this morning, dragging stocks lower in what promises to be a volatile day.

Rumors that Merrill Lynch will preannounce a writedown swept through trading rooms ahead of the open. Merrill declined to comment on that rumors, according to Reuters.

Separately, Merrill Lynch's analysts this morning made a significant call on big regional bank stocks, saying they expect dividend cuts at SunTrust, Wachovia, and Bank of America. The firm cut price targets and earnings estimates for the group and said bank stocks appear to be in "capitulation mode."

J.P. Morgan analyst Vivek Juneja also said more reserves are needed at large banks in a note this morning.

There is no economic data on the calendar, but this could be be an important day for crude ahead of Sunday's oil producers and consumers meeting in Jeddah, Saudi Arabia. It is also an expiration Friday in the stock market, and that could add to volatility.

Oil fell $4.75 per barrel, or 3.5 percent to $131.93 Thursday after China said it would increase the price for diesel by 18 percent. That helped stocks gain and the dollar rose against the euro for the first time in three days, reaching $1.5502 per euro. In the Treasury market, yields rose, with the 10 year reaching 4.201 percent.

Oil was moving higher this morning.

Citigroup was a negative for the financial sector Thursday but the group finished higher after a wishy-washy performance. Citi stock though finished off a percent on comments from its CFO that there could be more writedowns.

Citi CFO Gary "Crittenden's comments were not that surprising. The market decline in response to them may just indicate how jumpy the markets are right now," Sandler O'Neill anlayst Jeffrey Harte wrote to us. (Sandler has a client relationship with Citigroup)

This morning, Citigroup was lower after Ladenburg Thalmann analyst Richard Bove cut his target on the stock to $25 from $31 and projected a bigger loss. UBS also made negative comments on the stock.

The financials have been acting poorly this week, and Keefe Bruyette trader Pete McCorry doesn't expect much improvement ahead of earnings in the beginning of July as fears of dividend cuts and writedowns linger. "We're a couple three weeks from earnings. What's the catalyst for these things now? I don't see it," he said.

Saudi Success?

Cambridge Energy Research analyst Dan Yergin said this weekend's meeting will be very important for the Saudis. "The basic thing they want to do is bring a halt to what they see as a speculative bubble in oil prices. I think that's the central objective," said Yergin, CNBC's global energy analyst. "A lot of prestige and a lot of credibility is now invested in this and it's being done on very short notice."

Yergin said the Saudis are concerned oil shock will hurt the global economy, but they are also concerned about oil "overreaching." "As a result, oil could lose its dominant position in transportation, a loss of market share, and they don't want to be held responsible for this."

The Saudis are expected to increase the amount of oil they produce but Yergin says despite the numbers flying around, it is still unclear what the amount will be. It'll be a range. It may surprise us, but at this point it will be at least several hundred thousand barrels. We don't know the number of barrels ... the question is who wants to buy the barrels. That's a key determinant." The Saudis produce a heavy crude.

Yergin said China's announcement was very important. "It's a very powerful message and it's very likely it was timed to the Jeddah process. Whether it's been in the works for months or whether it was (this weeks' meetings with Treasury Secretary Hank) Paulson connected to this, it's been on the mind of the Chinese leadership for months, and they've always been worried about the social turmoil that would come from price decontrol ... So they chose to address it by subsidizing the sensitive groups, like farmers and taxi cab drivers, groups for who the burden falls disproportionately. But they're not going to subsidize the rising middle class any more," he said.

Yergin said China's move is also significant in that other Asian countries have also moved to decontrol prices. "It means that demand will start to reflect real prices rather than subsidized prices."

Getting Technical

One stock group that had a decent day Thursday and may benefit again Friday is tech. Look at the action in Apple , Research in Motion , and Amazon .

I spoke to T3 Capital's Scott Redler June 5 on a few of the tech names, including Research in Motion. Redler is a technical analyst and at the time, he pointed out that RIM was ready to break out, as we see it has.

This is what he told me June 5:

It is forming a pattern that is a precursor to a move. "If all the rest of the big cap techs move, we believe it will move to the upside," he said. "$140.25 would be the technical buy price and the measured move for Rim would be around $170," he said.

Since that time, a number of analysts have made positive comments on the stock including UBS, Lehman, Bank of American and AmTech this week. RIM reports earnings next week.

"A stock's not going to break out and have follow through unless something fundamental's going on,:" Redler said Thursday. "Now at $147, it's hard to initiate a trade here. At this point it's where smart money sells into the move. It probably will continue to act well into earnings which is next week." Redler said he would take profits now on a third of his position which would have been acquired at around $135. Redler's horizon is typically very short term.

(Readers: I have updated this commentary this morning to reflect market developments)

Questions? Comments? marketinsider@cnbc.com