Even with the July 4th holiday driving many investors to the the sidelines for part or all of next week, analysts think the markets will be as jittery as ever.
"The market is very nervous here," Steven Neimeth, portfolio manager at AIG SunAmerica Asset Management told CNBC.com. "Lower liquidity around the Fourth of July week could lead to greater volatility as a result of news events, whether it be the Middle East, oil or the credit markets. Any news, good or bad, is likely to have a heavy impact on the market."
"You're in that pre-earnings season where stocks are in a holding pattern until second-quarter results, so I wouldn't be surprised to see continued choppiness next week," said Charles Carlson, CEO of Horizon Investment Services.
"We're just going back and forth," said Harry Clark, CEO of Clark Capital Management. "Once we get past all of this nonsense, I think earnings will be surprisingly good, and then the market will take off again."
Analysts say the same culprits that have weighed on the markets recently will likely continue to contribute to volatility. This past week, investors were concerned that problems in the subprime mortgage industry would spread throughout the credit market, negatively impacting the private equity leveraged buyout boom.
"It appears that it's becoming much more difficult for private equity to finance recent highly- leveraged deals," said Neimeth. "Much of the support in the equity markets has come from the anticipation of more buyouts and this may be peaking with the volatility in the credit markets."
Neimeth points to this week's move by U.S. Foodservice, the nation's second-largest food distributor. U.S. Foodservice withdrew a $1.5 billion junk bond offering in response to investor jitters. The company is being acquired for $7.1 billion by private equity firms Kohlberg Kravis Roberts and Clayton, Dubilier & Rice.
"This is just another sign of the difficulty private equity is having getting deals done in a less friendly fixed-income market," said Neimeth.
Barry James, portfolio manager at James Advantage Funds, says there are plenty of other troublesome signs besides private equity.
"I think we're in a pretty high-risk area in the market and this volatility is symptomatic of it," said James. "You see margin debt at levels above where it was in 2000. Cash flows in mutual funds are at low levels, which tends to signal a trading top. There are a number of pieces falling into place that indicate risks are pretty high we will have a 10% correction at some point."
Economic data could also contribute to choppiness next week. The closely-watched monthly employment report will be released on Friday. Prior to that, Wall Street will get the latest reading on factory orders and pending home sales. The Institute for Supply Management will release its surveys measuring the manufacturing and services sectors.
Picking Prudent Plays
Many analysts believe better-than-expected second-quarter earnings could be the catalyst that puts the bull market back on track. In the meantime, they say there are opportunities, but investors need to make prudent decisions in these turbulent times.
"I think there is value out there," said Horizon Investment's Carlson. "If you find stocks you like and they are fairly valued, then you should buy them. This has been more of a pause than anything else, and it has proven to be beneficial to buy on the pauses."
Carlson likes Morgan Stanley and Accenture . "We think Morgan Stanley still has not peaked in terms of earnings," he said.
Accenture said after markets closed Thursday that quarterly profit rose as it benefited from strong demand for its consulting services.
Horizon's investors own both stocks.
AIG SunAmerica's Neimeth says investors can live through the volatility by using extra cash to buy defensive stocks that may be beaten down on a bad day. He likes cable operator Comcast . "It's a defensive name because of the nature of its business," said Neimeth. "It's cheap, and they have a strong balance sheet, which is likely to be used to buy back more shares."
Neimeth says another good defensive play is Johnson & Johnson . "This is a cheap, defensive healthcare name whose earnings are likely to be good this coming quarter due to large overseas exposure."
Even with oil crossing $70 a barrel this past week, Neimeth says there are still good buys in the energy sector. "Chevron continues to trade at a big discount to historic valuation," he said. "The company's earnings forecast is based on oil prices much lower than current prices."
AIG SunAmerica's funds own Comcast, Johnson & Johnson and Chevron.
Brian Hicks, president of Wealth Daily, also sees opportunity in energy stocks. "I think energy is a decade- or two-decade-long bull market," he said. "China and India are eating up commodities like there's no tomorrow. This bull market is being driven by capital investment into energy companies."
Hicks recommends Suncor Energy . "It's sort of the gold standard of Canadian oil sands companies," he said. "Production should double over the next five years, and Suncor will be right in the thick of it. It will continue to do excessively well."
Hicks owns the stock.
Barry James is also advising investors to think defensively. He likes McDonalds and AT&T . "We like companies that are larger in size, with pretty good international exposure. That's where we see the growth -- in the global economy. These companies may not be quite so susceptible to an economic downturn in the financials."
James Advantage Funds owns both McDonalds and AT&T.
Phyllis Burke Goffney is a news editor at CNBC.com. She can be reached at firstname.lastname@example.org.