Expect heavy turbulence in the week ahead.
Analysts say hurdles for the stock market in the coming week include continued uncertainty about financial sector—specifically mortgage giants Fannie Mae and Freddie Mac —as well as the unrelenting pressure of rising oil prices.
But U.S. officials took some of the anxiety out of the market Sunday evening when the Treasury and Fed said they would back stop Fannie and Freddie and allow them to tap the Fed's discount window if necessary. The focus is now on how Freddie will fare with a $3 billion securities offer Monday, the first such auction since the announcement and an event Wall Street will be watching.
Traders and analysts had speculated Friday that the government would make an announcement Sunday to show support for the two institutions and soothe worried financial markets ahead of the Asian market open.
U.S. bank regulators Sunday also moved to reassure IndyMac Bank depositors that they are in control of the troubled institution, which was seized by regulators Friday. IndyMac Bank was an aggressive mortgage lender and once had $32 billion in assets.
A boost for stocks may also come from InBev's frothy $50 billion offer for Anheuser-Busch, which the company's board was set to accept Sunday night at a meeting in St. Louis.
There is a heavy calendar of economic data, corporate earnings reports, plus two days of testimony on the economy from Fed Chairman Ben Bernanke.
"The financials are going to have a tough go of it next week," said Jefferies and Co. Chief Strategist Art Hogan. In addition to the swirl of speculation that has driven Fannie and Freddie shares lower and lower, major banks are reporting results and are expected to unveil more write downs.
Also worrying Wall Street is Lehman Brothers stock, which has been spiraling downward on credit worries. "A resolution (for Fannie and Freddie) would help. Whether it's a government take out or a back stop committing access to capital," said Hogan.
James Paulsen, chief investment strategist at Wells Capital Management said oil will be a concern for stocks in the coming week but Freddie and Fannie could be more worrisome. "The meltdown of Freddie and Fannie (stocks) will not reduce the ability of what they can do," but the market remains fearful, he said.
The Dow lost 1.7 percent, falling to 11,100 in the past week. For the first time in two years, it dipped below the key 11,000 level. The Nasdaq lost just 0.3 percent for the week and the S&P was down 1.9 percent, finishing at 1239. The financial sector declined 6.3 percent for the week, followed by consumer discretionary with a 4 percent loss. The winner was the S&P healthcare sector, up 1.3 percent.
"We'll have a plethora of economic data but none of it will take away from the earnings data," said Hogan.
Hogan said most earnings will be routine, like those from General Electric Friday which was in line with expectations. Yet, "I think we could get some upside surprises because we've priced in worst case scenario in a lot of areas," he said.
There's a real cross section of data in the week ahead that will show how the consumer, housing and manufacturing segments of the economy are faring and just how hot inflation has become.
A big event will be the two days of testimony from Bernanke. He gives his semiannual testimony on the economy before the Senate Banking Committee on Tuesday and then appears before the House Financial Services Committee Wednesday. Bernanke will include in his testimony the latest quarterly economic projections from Fed governors and bank presidents.
"I don't find him capable of saying anything that's going to take us by surprise," said Hogan. He said Bernanke is not likely to change his economic view and his testimony is likely to probably mirror comments he made before the House Finance Committee Thursday where he was discussing regulation of the financial system.
The Fed also releases the minutes of the last FOMC meeting Wednesday at 2 p.m. The economic projections that are usually released with the minutes will be issued the day before with Bernanke's testimony.
On Tuesday, retail sales for June are reported. On the same day, the Empire State survey is reported and producer prices for June are released. Consumer inflation data, CPI is reported Wednesday morning, as is industrial production. The Treasurys international capital flow data is issued Wednesday morning. The National Association of Home Builders survey is released Wednesday afternoon.
On Thursday there are weekly jobless claims, housing starts and the Philadelphia Fed survey for July.
Wells Capital's Paulsen says the jobs data could be the most important number of the week and may not be as weak as expected. "Given the strong signs of flattening, those could be big," he said.
Paulsen said recent data has been better than expected, including Friday's trade numbers but the market is ignoring it. "It isn't the economy, it's the sentiment," he said.
He said after periods of very bad sentiment, there are often big opportunities. "I have to worry stocks go lower for the next three months," he said. But he is still a buyer with a long-term horizon. He said two years from now, returns on investments made now will look good.
"It's a highly volatile market. It is not investor risk. That's trader risk," he said.
The trickle of earnings reports we've been seeing will turn into a deluge by the middle of the week.
Financials, industrials, technology and health care companies report.
Among the financials Charles Schwab, State Street and US Bancorp report Tuesday. Northern Trust and Wells Fargo report Wednesday. BlackRock, JPMorgan Chase, Merrill Lynch, PNC, Bank of New York Mellon and CIT Group report Thursday. On Friday, Citigroup reports.