The play book for stocks in the week ahead will be written in corporate earnings reports.
But the longer term wins and losses for the market will be decided by the Fed.
For that reason, traders are focusing on major inflation data and retail sales reports Tuesday and Wednesday to see if inflation is tame enough and growth is sluggish enough to push the Fed to act even before its Jan. 30 meeting. Another highlight will be Thursday testimony by Fed Chairman Ben Bernanke before the House Budget Committee.
The markets have been on high alert for an emergency Fed rate cut after Fed Chairman Ben Bernanke said Thursday that the Fed is willing to make "substantive" moves to protect economic growth.
Citigroup's Jeffrey Applegate, in an interview on "Street Signs" Friday, said Bernanke's comments showed a real change in thinking by the Fed but actions must follow.
"The key thing for the market there is to key off what Chairman Bernanke signaled about Fed policy ... which is that the Fed will do whatever they think they need to do to help the economy and by extension, the global economy, avoid a recession," said Applegate, Chief Investment Officer with Citigroup Global Wealth Management.
Applegate said Citi is of the view the economy will avoid a recession, but only with significant help from the Fed. This week, Goldman Sachs became the latest Wall Street firm to predict the economy will fall into a recession this year.
"The Fed needs to get in front of the curve and in front of the market," Applegate said. "The Fed has been behind the market. That's why equities have been unable to find firm footing really since July."
Based on Bernanke's comments, Applegate sees the Fed finally focused on the concern of slowing growth instead of the balanced risks of inflation versus growth. "So now the Fed will have to move more rapidly, and that's what we're expecting, but that doesn't mean equities markets have yet made their lows."
But it's the earnings reports that traders are awaiting, particularly the key reports from major financial firms, like Citigroup, Merrill Lynch and J.P. Morgan. Ironically in a market that took most stocks dramatically lower Friday, the financial group was one of the least slammed (with some exceptions) as investors bet the group could be close to a bottom.
Bank of America's planned $4 billion buyout of troubled Countrywide certainly helped. CNBC's Charlie Gasparino reported that J.P. Morgan is now eyeing Washington Mutual, which saw its stock rise.
The Dow had its worst first eight days of the year in 17 years. It was off 1.5 percent this past week at 12,606 and is off 5 percent since the start of the year. The Nasdaq was down 64 points, or 2.6 percent to 2439 for the week, and the S&P 500 was down 0.8 percent for the week, ending at 1401.
Health care stocks were the best performers of the week, up 4.8 percent, and utilities were next, up 2.5 percent. Telecommunications stocks were the worst hit, down 4.5 percent.
Commodities remained on fire in the past week, with a flurry of activity in the grains markets around major crop reports. They promise to be active in the coming week as well. The run in precious metals continued. Gold briefly crossed the $900 threshold, closing the week at $896.10 per troy ounce, a fresh record. Gold gained 3.82 per cent for the week.
The dollar fell 0.2 percent against the euro and was 0.5 per cent higher against the yen. The yield on the 10-year ended the week lower, at 3.808, and the two-year was at 2.591 percent.
Banks, drugs, and tech are among the parade of companies reporting earnings in the week ahead.
Citigroup and US Bancorp report Tuesday, while J.P. Morgan Chase and Wells Fargo report Wednesday. Merrill Lynch reports results Thursday before the bell, and Washington Mutual reports Thursday after the bell.
Merrill is expected to report bigger subprime related writedowns, reportedly as much as $15 billion, and Citigroup could also report more write downs. Traders are expecting the quarter to be particularly ugly for financials, but the theory is big writedowns could clear the books for better future earnings. Citigroup is also reportedly expecting another big capital investment, possibly $15 billion worth. Possible investors include Saudi Prince Alwaleed bin Talal, already a big Citi investor.
Tech companies reporting include Intel, after the bell Tuesday, and IBM, after the bell Thursday.
Genentech reports rafter the bell Monday. General Electric, parent of CNBC, reports profits Friday.
J.P. Morgan chief equities strategy Thomas Lee, in a note Friday, said this earnings period won't be one that investors are likely to see as a buying catalyst. "4Q is not much to get excited about, and it is unlikely to turn bears into bulls," he wrote. He said growth for the S&P 500 stocks is expected to be negative 10 percent for the fourth quarter, after a five percent decline in the third quarter. He said technology, energy and materials will be the brighter spots.
Other than earnings, there's plenty of other corporate news and events to consider, including the big Detroit Auto Show, which runs throughout the week.
Just days after the rest of the industry touted their wares at the Consumer Electronics Show in Las Vegas, Apple holds its own big show, MacWorld, in San Francisco from Monday to Thursday. CEO Steve Jobs speaks there Tuesday.
The entertainment industry looks forward to the Sundance Festival starting Thursday.
On Tuesday, producer price data is reported at 8:30 a.m. Tuesday and on Wednesday consumer prices are reported at 8:30 a.m. Retail sales is also a big item when it is reported Tuesday at 8:30 a.m., particularly after December's sloppy sales results from chain stores.
"If there's going to be an emergency rate cut next week, it will come exactly at 8:31 Wednesday morning," said CNBC senior economic correspondent Steve Liesman. "It will be one minute after the release of a benign inflation report and 24 hours and one minute after a scary retail sales report. If those two conditions are met, the Fed will be free to do an emergency rate - 50 basis points now and 25 at the end of the month."
Empire state manufacturing survey is also reported at 8:30 a.m. Tuesday, and business inventories are released at 10 a.m. that day. On Wednesday weekly mortgage application data is reported at 7 a.m. and the housing market index is released at 1 p.m. Treasury International Capital data, which shows foreign flow of funds is released at 9 a.m. The Fed's Beige Book is reported at 2 p.m. Wednesday.
On Thursday, housing starts are released at 8:30 a.m. Weekly jobless claims are also reported that day at 8:30 a.m. The Philadelphia Fed survey is issued at 10 a.m, a new time for the report which had been issued previously released at noon. Leading indicators are also reported that day at 10 a.m.
On Friday, consumer sentiment is released at 10 a.m. The bond markets close early Friday, ahead of the Martin Luther King holiday the following Monday.
Fed speakers will also be out and about, in addition to Bernanke. St. Louis Fed President William Poole speaks at 9:30 a.m. Wednesday in St. Louis to a financial planning group; Dallas Fed President Richard Fisher speaks about protectionism in Philadelphia Thursday at 1230 p.m. and Atlanta Fed President Dennis Lockhart speaks on the economic outlook Thursday at 1:15 p.m. in Montgomery, Ala. Richmond Fed President Jeffrey Lacker speaks on the economic outlook in Richmond at 8 a.m. Friday.
Oil inventory data is reported at 10:30 a.m., as usual Wednesday and natural gas supply data is released Thursday at 10:30 a.m. February crude at Nymex fell 5.3 percent for the week, ending Friday at $92.69 per barrel.
I will be away for a few days, so the Week Ahead will return in two weeks.