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Friday Look Ahead: Double Dip Talk Could Dominate a Light Volume

There are no economic reports for markets to obsess over Friday, though the double dip debate will no doubt continue as traders look ahead to next week.

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Gold was one of just a few bright spots in a sea of red for commodities and equities. Treasurys saw buying, which pushed the 2-year yield to a record low of 0.475 percent, and the 10-year yield to a new 17-month low of 2.557 percent.

Stocks Thursday were rocked by disappointing data, overwhelming the positives from another flurry of merger news. Ahead of the opening bell, Intel announced it would buy McAfee for $7.68 billion. But a 500,000 print on jobless claims, the worst level since November, along with a surprise negative from the Philadelphia Fed sent stocks spiraling downhill.

The S&P 500 dipped below the important 1070 level but crept back to finish the day at 1075, still a decline of 1.7 percent. The Dow fell 144 points, or 1.3 percent to 10,271. At the low of the day, it was down 199 points. Traders said it was a slight positive that the market was able to claw back from its lows.

"It is a Friday in the summer, and you know what you can expect...not much, not much trading," said Bill Stone, chief investment strategist with PNC Wealth Management.

Stone said on Thursday, the Intel deal might otherwise have been a plus for stocks. "If you could get the macro numbers out of the way, you would have had a nice day if it weren't for claims and the Philly Fed laying an egg. The combo of those two outweighed everything else. It was like a one-two punch," he said.

Traders were already looking ahead to next week's jobless claims number, fearful it could show a fourth week of increases. There is also housing data, revised second quarter GDP, and durable goods orders next week.

On Thursday, the VIX, the CBOE's volatility index, jumped 7.5 percent to 26.44, as the stock market sold off. "The more we waiver below 1100 (on the S&P 500), or are unable to take out the 1100 level, there seems to be more aggressive volatility buyers out there on the possibility it could break down," said Dan Deming, who trades the VIX with Stutland Equities.

"Based on the fact that the futures on the VIX right now have been trading at a premium, and have for a couple of weeks, that hints that there could be rough waters ahead," he said. The VIX at 26 implies a 1.5 percent daily move in the S&P 500, in either direction.

The next stopping point on the downside for the S&P would be 1065, he said. "Any break below 1050, I would expect the VIX to be in the upper 30s," he said.

Soft Patch or Double Dip?

J.P. Morgan economists Thursday cut their growth forecast for the second half, shaving GDP to 1.5 percent for the third quarter, from 2.5, and 2 percent for the fourth quarter, from 3 percent. They also said unemployment could rise to 10 percent.

"Although we previously lowered the forecast for GDP growth for 2H10 in response to signs of softening around mid-year, the slowdown in hiring and spending over the past few months had been viewed as a temporary response to a series of shocks that would moderate over time. But the continued softness in July economic indicators along with the sharp rise in initial jobless claims this month suggests that weakness is intensifying rather than moderating," they wrote.

They also noted that the loss of momentum raises the risks of a prolonged soft patch and even another recession. They also expect the Fed will now undertake a larger quantitative easing program by the end of the year and expand its balance sheet through asset purchases.

Dan Greenhaus, chief economic strategist at Miller Tabak, said he expects the revision to second quarter GDP, reported next Friday, to show the economy grew at a paltry 1.3 percent. "Growth in the 1 to 2 percent range is very close to recession. It is not sufficient to affect the unemployment rate. It is not sufficient to generate meaningful income growth, and it's not sufficient to support consumption. It is very hard to envision a scenario where GDP stays at a level of 1 to 2 percent for long...the risk is to the downside from there, rather than the upside," he said.

Greenhaus said he expects second half growth of 2 to 2.5 percent, or less. "I don't think an outright contraction in GDP is the base case. I certainly think, as a long time bear, that the probability is a lot higher than people are suggesting," he said.

"The investing landscape over the next six months is going to be very difficult and investors have to be very particular in this type of environment. It's not that equities can't appreciate," he said.

Greenhaus charted the average move in the S&P 500 against GDP levels of up to 4 percent for the past 50 years. With the exceptions of some big outliers, weak GDP means weak stock appreciation. "In this low growth, modest S and P growth is likely," he said. (Editors: Please display Graphic 38776142 here)

Federated Investors market strategist Linda Duessel said stocks trade sideways to lower in a soft patch. "We think we'll stay in a sideways pattern for awhile. It's a tough question because the market expects QE 2 to come. It presumes we would get that and it would be a good thing," she said, adding the Fed would likely make its move either after a poor showing in the Sept. 3 employment report or after the November election.

She thinks the S&P could test 1020 or even 1000, but that the risk is to the upside for the market in the fall.

Spam and Jam

Hormel and JM Smucker report earnings ahead of the opening bell.

Questions? Comments? Email us at marketinsider@cnbc.com

Follow me on Twitter @pattidomm.

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