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Market Insider: The Week Ahead

Stocks could sprint higher into the coming week, as a strengthening dollarand declining commodities prices encourage buyers hoping for a reprieve from inflation.

The focus again will be on oil, and the strengthening U.S. dollar and parallel decline in the price of all commodities. The stock market soared Friday as the dollar scored its biggest one day gain against the euro in more than six years, and oil fell to a level not seen since May 1.

But traders warn the market could remain choppy in thin summer trading, and stocks still face the pitfalls of the lingering credit crunch and a sluggish economy. Oil is also the wild card. If geopolitical events heat up, including the movement of Russian troops into Georgia, crude's trend could easily reverse.

There's some key economic data in the week ahead, including retail sales and consumer sentiment. Consumer price inflation data is expected on Thursday, and the earnings of some big retailers, including Wal-mart, will be another window into the pressure on consumers.

Whither Stocks?

Stuart Freeman, chief strategist at Wachovia, says it is a good time for investors to selectively add to stock positions, but he doesn't expect the market to make much head way for now. "We're still in the vacation portion of the year, and even some of the large moves we've seen in the last month have not been on dramatic volume, so we're just bouncing around here a day at a time and a piece of news at a time. We'll probably go into the fall trading in a range here and probably well into the third quarter, kind of bouncing around and not moving upward," he said in a phone interview.

"We think the market (S&P 500) could trade in the range from this (mid 1200) area to the 1400 plus area at the end of the year, as we get through the third quarter and probably get more favorable data," he said. (When Freeman was speaking the S&P 500 was trading at about 1260.)

One of the big shackles on stocks is the state of the economy and he sees more earnings trouble ahead in the third quarter, but by fourth quarter earnings comparisons could start to improve. He expects retail sales data this Wednesday and consumer sentiment on Friday to reflect tepid spending and a concerned consumer.

"I think investors should be accumulating here. If they don't want to do it all at once, do a piece here, another piece in three months," said Freeman.

He said the negativity and breadth of the market decline has been strong enough for history to suggest there could be a 20 percent move in the S&P in the next 18 months. This is the kind of environment where long-term investors should slowly average into some of the cyclicals that have been hit hard. "It's always the hardest decision to make when thing are down," he said.

Freeman said the market is still "picking along" and may retest its lows again before finding a bottom. He said the decline in oil is very helpful and should bolster consumer sentiment. "I think oil is going to be very volatile. I do think there's potential for it to move back toward the $100 area. There's a reason it's broken. You're seeing it in slowing international demand and cautious use of gasoline here, and a still a soft economy here. There's a demand shift that shows a real impact," he said.

As far as stock groups, "we're kind of in a neutral place with respect to sectors. We had been very defensive for two years. About a month ago, we became more neutral," he said.

Freeman said he currently recommends overweighting industrials. "We think the combination of the pickup here and the slow growth aboard is going to continue to bring some growth here, as it has over the last year. He is currently underweighting health care, utilities, and is even weight energy, tech and financials.

"I feel better about the market than I do about the economy right now. It's a confidence thing. The market tends to a look a little farther out," he said.

In the past week, the stock market bolted higher, with the Dow up 408 points or 3.6 percent to 11,734. The S&P 500 rose 36 points, or 2.9 percent to 1296. Traders see the next area of resistance for the S&P now at 1305-1311. The 10-year Treasury added a full point to 100-13/32 in the past week, raising its yield to 3.950 percent.

The financial sector gained 1 percent for the week, even with negative news from Fannie Mae and Freddie Mac. The best performers were consumer discretionary, up 7.7 percent; tech, up 6 percent, and health care, up 4 percent. Worst performers were energy, down 4 percent and materials, off 3 percent.

Oil Gets Drilled

Oil fell 7.9 percent in the past week, tumbling to settle at $115.20 per barrel. Crude is now 21 percent below its record close, set on July 3.

M.F. Global's Michael Fitzpatrick said he thinks oil is now oversold and should be trading about $5 to $7 higher. "If the sell off is based on the premise that demand is contracting not only here in the U.S. but in Europe and the developing world as well, then I think there's a level of economic activity that would mean it should be higher t than this," he said. Fitzpatrick said if Russia's movement of troops into Georgia begins to threaten oil or gas facilities then there could be a market reaction.

But if not, and oil continues its negative trend, the next stop could be a level of $110.30, he said.

Bottom Dollar?

The big runup in the dollar against the euro has currency traders crowing about capitulation of the euro currency. The dollar on Friday jumped 2 percent and for the week it rose 3.5 percent, its biggest weekly gain against the euro since January, 2005. It finished Friday at $1.5018.

The dollar's move came after the European Central Bank Thursday held rates steady, and ECB President Jean Claude Trichet indicated concern about the European economy. "The dollar is gaining in default, but it's not in any way an economic referendum on the U.S. economy. It's a lack of confidence in the European economy. I think at $1.48 (per euro) we're definitely going to see it stabilize," said Boris Schlossberg, director of currency research at GFT Forex.

Schlossberg said once the dollar went through $1.55 "all the long term funds, all the people long euros for a long term trend began to liquidate and you had a cascade of stop losses."

"It's an example of what a speculative market can do," said Boris Schlossberg, director of currency research at GFT Forex. "It's telling me most of this liquidation in the euro should find a bit of stability here. There's nothing on the economic calendar on the U.S. side or European side that is really going to prop the euro up," said Schlossberg. He did note that Eurozone GDP will be reported in the coming week, and it could be negative for the first time since 2003.

Econorama

The coming week's economic calendar offers a good look at how both the consumer and industry are faring, as well as a read on consumer inflation.

On Tuesday, the NFIB small business survey is released as is international trade data. Wednesday's releases include retail sales, import prices and business inventories. Weekly jobless claims are reported Thursday as is CPI. On Friday, the Fed's Empire State survey is released. Industrial production and consumer sentiment are also reported that day. The Treasury also issues its international capital flow data Friday.

Earnings Central

Retailers reporting earnings in the coming week include TJX on Tuesday; Macy's Wednesday, and Kohl's, Nordstrom and Wal-Mart Thursday.

Abercrombie and Fitch and J.C. Penney report Friday.

Other companies to watch include Petrobras and Liberty Media on Monday, Applied Materials and Thomson Reuters Tuesday; Deere on Wednesday and Agilent on Thursday.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.