Stocks are likely to remain hobbled by gushing oil prices in the week ahead, but it's also the start of the earnings season, and that will ultimately influence direction.
It's a relatively quiet week for data, but other news will fill the void. There are two appearances by Fed Chairman Ben Bernanke, and President Bush attends the G-8's summit in Hokkaido, Japan in the beginning of the week.
A surge in negative sentiment bit into stocks in the past week. That negativity though may be hitting a crescendo and provide a buying opportunity, says Bob Doll, BlackRock vice chairman and global chief investment officer for equities. Doll said he listens to investor sentiment when it hits extremes.
"When you get extremes in either direction, it pays to be contrarian," he said. "We have a lot of negativity." The last time I spoke to Doll was May 16. At the time, he told me he didn't want to sound bearish, but stocks were ready to take a pause. Pause they did. A bit of a breathtaking pause.
"You have to be brave to buy stocks in here. It's not all that dissimilar from January and mid-March," he said. "I wouldn't be a hero. I don't think we're going straight up." See more of my interview with Doll on CNBC.com.
Stocks finished the week lower. The Nasdaq led the decline, losing 3 percent for the week. The S&P 500 was off 1.2 percent, and the Dow fell just 0.5 percent. Gold rose $2.60 per troy ounce to $931.90. The dollar edged higher by about half a percent against the euro.
Second quarter earnings season is expected by many analysts to be an important test for the markets. There has been a sense that this mid-year point is when companies would start to show the wear and tear of a slowing economy, the continued bite of the credit crunch, and pressure from rising commodities prices.
The second quarter earnings reporting season kicks off with Alcoa's earnings Tuesday after the bell. There are just a few reports in the coming week, but the other big one is General Electric , which reports Friday.
GE disappointed in its last quarterly report, an unusual occurrence for highly predictable conglomerate, and its stock has been driven down in part by concerns about the potential for further surprises from its financial unit. (GE owns CNBC.)
"If they miss again, that's going to be pretty bad. They have to at least match expectations," said Brian Rauscher of Brown Brothers Harriman.
I like to speak to Rauscher around earnings season because he watches the numbers like a hawk. He points out that aside from the financial companies, analysts have actually been raising estimates for the second quarter. The expected improvement in per share profits for the non financial companies in the S&P 500 is 9.4 percent.
"Part of the reason why it's ticked up a little is the energy companies continue to see earnings ratcheted up," said Rauscher. "I think the message is most people would be surprised that the general level of earnings is okay. The financials are continuing to be a minefield, and the homebuilders and autos are weak. I would still make the case, earnings aren't that bad," he said.
"When I start looking at the levels of valuation and where we are—I've been cautious about the market for a long time—either we start to find a floor or the earnings are going to start to deteriorate much more than they are now. That's kind of where we are. We're really at a cross roads here," he said. Rauscher said he is still bullish energy and he is telling clients to be cautious on the market here, and not make new big bets.
"You're going to see the strong and the less strong really bifurcate here," said Rauscher. He said oil is also a wild card for corporate profits.
"Fundamentally I still see this as a slow bleed, but technically I see this as a disaster. Technically the market is acting very poorly. I would make the case that the fundamentals are not supporting the technicals," he said.
Also this week, Chevron will release an interim earnings report Thursday after the bell. Marriott reports quarterly numbers Thursday, and Pepsi Bottling reports Tuesday.
On Tuesday, Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson both speak at the FDIC forum on mortgage lending for low and moderate income households in Arlington, Va. J.P. Morgan CEO Jamie Dimon is also scheduled to speak there.
Thursday is the big day. Both Bernanke and Paulson appear at a House Financial Services Committee hearing to discuss oversight and regulation of the financial markets and financial firms. They are expected to discuss how to improve the regulatory structure and avoid future episodes like the Bear Stearns collapse.
Data releases include the NFIB small business survey Tuesday at 7:30 a.m. Pending home sales for May and wholesale trade are also reported that day at 10 a.m. Weekly jobless claims are reported at 10 a.m. Thursday. On Friday, international trade data and import prices for May is reported at 8:30 a.m. Consumer sentiment is released at 10 a.m. Friday.
Fed speakers in the coming week include Richmond Fed President Jeffrey Lacker who speaks in Washington Tuesday at the National Economists Club at 12:30 p.m. San Francisco Fed President Janet Yellen speaks at 11 a.m. on the economic outlook in San Diego Monday and again Thursday at 3:30 p.m. in Portland, Ore.
Oil finished the week at $145.29 per barrel, a record high. Weekly oil inventory data is reported Wednesday at 10:35 a.m. Oil was up 3.6 percent for the week. Heating oil was up 5.1 percent for the week, settling at $4.1060 per gallon. Gasoline was 2 percent higher at $3.5710 per gallon on the Nymex.
Also to Watch
Other events to watch include the annual Sun Valley media conference, which attracts major media executives and Wall Streeters. It runs Tuesday through Thursday. Oppenheimer holds a consumer growth conference in Boston Tuesday through Thursday.
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