back stop Fannie Mae and Freddie Mac . Both of those developments remain front and center for the markets in the week ahead.
Crude's direction could be determined in part by a weekend meeting between a senior U.S. envoy and Iran's top negotiator on Iran's nuclear program. Traders say news of these talks—the highest level between the two countries in nearly 30 years—has drained some of the "Iran" premium from oil prices. Oil closed the week at $128.88 per barrel on a number of factors, including concerns about economic slowdown.
Just a week ago, markets braced for the worst when it came to Freddie and Fannie and will now instead watch Congress hash out housing legislation that would include a plan for a new regulator and financial back stop.
"How the markets are driven in the next couple of days will be less about the economic calendar and more about what transpires," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "My sense is anything financial market related, especially with financial institutions, will be key."
Durable goods, housing data and the Fed's Beige Book are released in the coming week. Also on the economic front, Treasury Secretary Hank Paulson speaks on the economy Tuesday morning in New York, a speech that will be watched closely for word on the credit situation and the government sponsored entities, Freddie and Fannie. The House Financial Services committee on Thursday holds a second hearing on the financial system, and New York Fed President Tim Geithner and SEC Chairman Christopher Cox are among the speakers.
The Dow rose 396 points or 3.6 percent this past week to 11,496. The S&P 500 climbed 1.7 percent to 1260, it's best week since May 30, and the Nasdaq was up 2 percent to 2282. The dollar gained 0.53 percent against the euro for the week and about the same against the yen. It was trading at $1.5840 per euro Friday. Gold during the week slipped $2.20 per troy ounce to $957.30.
Treasurys saw yields rise, with the 10-year at 4.085 percent, its highest level since June 25. The two-year was at 2.618, its best yield since July 1.
Merrill Lynch's chief investment strategist Richard Bernstein said the move in oil is important but he does not see the stock market as making a major turn now. "This rally may go on for several days. It may go on for a few weeks. Who knows? ...This is not the inflection point people have been waiting for."
"I still think there's a lot of earnings risk and sentiment isn't quite what it should be," said Bernstein in a telephone interview. He said people are getting more bearish and valuations are coming in, ultimately a good thing for stocks. But he doesn't think the market's ready for its next bull run.
Bernstein expects the S&P 500 to be about 8 percent higher a year from now. "Given that's the longer term return on equities, we basically think the market's fairly valued," he said.
Art Cashin, director of floor operations at UBS, said traders are watching the news ticker in the week ahead and "we'll have to play it by ear.
"I think we have the logical risk of rolling over here and maybe retesting," he said. Cashin thinks though stocks could rally again before putting in another bottom in October.
The financials have been at the heart of the stock market's ills since the start of the credit crunch (just a year ago). In fact, this Saturday, July 19 marks the one-year anniversary of the Dow Industrials' first close above 14,000. That was just about 18% above current levels.
This week, financial stocks exhibited extremes. They were pummeled by the dual worries of the GSEs and the failure of IndyMac Bank, before reversing on better than expected earnings news and the SEC's short selling rules. The S&P financial sector scored a more than 11 percent gain on the week.
Bernstein says he's still staying away from financials. He said the time to look at financials is when the government puts a facility in place to move bad assets off of balance sheets, and that hasn't happened. He said the government is treating each event as a "once off." That was how the Japanese treated their banking crises
"That means it will be dragged out,'" he said.
"Is this the proper route to solve the credit crises quickly? History suggests it is not," he said. Bottom line? "I have thought and continue to think, you don't want to be an equity investor in financial stocks," he said.
"I think people are looking at this very, very wrong. They are saying if housing stabilizes, everything will be okay. If oil stabilizes, we'll be okay. I'm saying the opposite. I say credit has to stabilize," he said. Bernstein said there could be more bank failures before the credit crises is over.
"If you had the bank failure rate you had in 1989, it means 250 to 275 banks and thrifts would have to fail," he said. The bank failure rate in 1989 was 3.5 percent. "I don't think it would be outrageous to make that comparison. "
Bernstein said the constriction of credit is continuing to creep and is impacting more business borrowers. "This is the credit malaise spreading to more industries, it's not just subprime," he said.
What to buy?
Bernstein says one positive trend in stocks is a pickup in mergers in commodities areas. He also likes select sectors.
"I think traditional defensive sectors have been performing better. Consumer staples have been moving up in the ranking," he said. He also likes "old technology." He said that would include the 10 largest technology companies, excluding Apple , Google and Research in Motion . One would think IBM , Microsoft and Hewlett-Packard are at the top that list.
"Those 10 largest companies have outperformed the S&P in the first half of the year," he said. Google, by the way, had its worst drop ever Friday after reporting an earnings miss.
"Outside of the equities markets, I'm a pretty big bond bull which people think is absolutely insane right now," he said. He noted that the last Merrill Lynch global fund managers survey, released this past week, showed that not one of the portfolio managers surveyed anywhere in the world believes interest rates would be lower in the next 12 months. He said the fact that bonds are such a universally out of favor group makes them attractive. (Note to readers: clarifies that bonds are attractive because they are out of favor)
So far, corporate earnings news has been mixed, and strategists expect to see estimates continue to be ratcheted down. In the past week, some banks—Wells Fargo and JPMorgan Chase —surprised positively, while some big tech—Google and Microsoft—came up short. So far, 82 S&P 500 companies have reported and 72 percent have beat estimates, while 20 percent have missed.
Profits for the S&P 500 are expected to be down 17.5 percent this quarter, but if the financials are excluded, earnings would be up 8 percent.
Major blue chips of all flavors report in the week ahead. On Monday, Dow component Merck reports before the bell, along with industry rival Schering-Plough. Texas instruments, Apple and Bank of America also report that day as does American Express.
On Tuesday, Caterpillar, DuPont, Wachovia, Washington Mutual, Yahoo and UPS report, as do band U.S. Airways.