Stocks in the coming week will start to navigate a mine field of fourth quarter earnings reports and economic data, none of which is expected to be good.
The earnings season kicks off Monday with the release of earnings from Alcoa, the first Dow component to report and a company that just last week announced layoffs and a restructuring.
"We're about to head into a season of scheduled bad news," said Art Hogan, managing director at Jefferies "There's nobody who believes this is going to be anything less than a disaster."
More From CNBC.com ...
Hogan said there's a chance though that stocks could move higher. "This week was the precursor of the earnings week. We might have had sell on the rumor. I'd say next week is higher, not lower. Access to the corporate credit markets opened up this week, and there were three major deals in one week. We haven't talked about three deals in one week before some time in the spring," he said.
The action in Washington will continue to take center stage for markets, as Congress discusses a new fiscal stimulus plan and new legislation to tap the remaining funds from the financial bailout. The second half of the $700 billion in "TARP" funds could come with more strings attached for financial companies in terms of disclosure and capping executive pay.
Also in the coming week, there could be resolution of talks between Citigroup and Morgan Stanley to merge their brokerage unit into a new joint venture. Early in the week, news from the Detroit Auto show, which has scaled back dramatically, will once more highlight the dire shape of the auto industry.
But it's the earnings that has markets on edge. Profits for S&P 500 companies are expected to be down 15.1 percent year over year in the fourth quarter. Analysts, as recently as October, had expectations for the quarter to be positive, showing double digit growth with earnings up more than 40 percent.
"What has changed at the margin is companies do not feel the need to preannounce," said Brian Rauscher of Brown Brothers Harriman. "If it's like the past, once we get through the preannouncement season, we could have a little bit of a relief rally. What I'm a little worried about though is that the companies haven't been preannouncing."
Rauscher said he expects a broader group of sectors to feel the brunt of the softening global economy. "It's generally showing that the deterioration of the economy has certainly spread. A couple of quarters ago, we saw it just in certain areas. Now we're seeing it in companies that have global exposure... You're seeing a whole gamet of reasons why profits are coming down and how they're getting hit. You're going to see a lot of misses on things that are cyclical," he said.
Rauscher said he thinks stocks have another big move down and could retest and even break through lows, but that's when he would start to buy. "The reason I would buy is I think you'll see a trough in the earnings cycle. There'll be enough second derivative evidence for people to have a rally of a longer duration...What I'm less clear on right now is at the end of that, does the data turn positive and the rally continue, or does the data stay flat and we come back down again," he said.
"If I was a betting man, based on everything out there, the highest probability scenario is you turn in the third quarter earnings reports over second quarter, but that doesn't mean they go positive," he said.
Alcoa and Infosys report Monday after the bell. Xilinx reports Wednesday. Intel and Genentech report Thursday after the bell. There are just a few major earnings reports in the next week.
Investors will also be watching for earnings clues and other news from the annual J.P. Morgan health care conference which runs Monday through Thursday. About 300 companies will be present.
(Click on video for a preview to earnings season)
There's a stream of economic data in the week ahead that will paint more of the picture of the fourth quarter's decline. Also, Fed Chairman Ben Bernanke speaks Tuesday at the London School of Economics on "the crisis and policy response." He will take questions at the 8 a.m. ET event.
Inflation data is released with producer prices Thursday and the consumer price index Friday.
On Tuesday, international trade is reported, as is the NFIB small business survey. The NFIB has already said its survey contains a very weak employment component.
- Analyze This: The Fundamentals or Charts?
- Expect Dow 11,000 on 'Obama Bounce': Investor
- Pros Say: Oil to Slip to $30
Wednesday's data includes the retail sales number for December; import prices and business inventories. The Fed's beige book on the economy is released Wednesday afternoon. On Thursday, weekly jobless claims and the Empire State and Philly Fed surveys are reported. Industrial production, consumer sentiment and Treasury international capital flows data is reported Friday.
Other Fed speakers include Atlanta Fed President Dennis Lockhart who speaks on the economic outlook Monday; Philadelphia Fed President Charles Plosser speaks on the outlook Wednesday, and Richmond Fed President Jeffrey Lacker speaks on financial conditions Friday.
Issuance in the corporate bond market wasn't the only sign that the credit markets showed signs of unfreezing in the past week. The Fed dipped into the mortgage markets, and that resulted in lower yields. Libor continued to decline. Other measures of credit health also perked up, including the two year interest rate swap which dipped to levels not seen since before the start of the credit crunch in the summer of 2007.
Traders view these events as small steps, given the amount of government involvement in the financial markets. "The reality is there's plenty of money out there. There's no demand to borrow it yet," said Kevin Ferry of Cronus Futures Management. Ferry said another issue for markets is the continued volatility in currencies and there needs to be more stability there in order for other markets to heal.
"Currency moves are on an order of magnitude that we would call insane," he said. The dollar gained 3.1 percent against the euro in the past week, taking it to $1.3431 per euro. The dollar also fell 2.2 percent against the yen.
Commodities markets were also active in the past week, with oil tumbling nearly 12 percent, but other markets rising. Soybeans and oats were both 8.5 percent higher while wheat was up three percent. Gold was down nearly 3 percent, and copper was 6.8 percent higher.
Carol Hurley, senior market strategist at Lind-Waldock, said she is watching the monthly USDA report on world agriculture supply and demand, due at 8:30 a.m. Monday.
"This one could be important just because of the South American situation," she said. "They've been having a drought down there, and the farmers didn't purchase fertilizer because of the credit crunch so their yields are expected to be pretty low and that's why grains have been moving higher."
She will be particularly watching for news on corn and soy beans. "They've just been marching higher since the beginning of December, and China's making record purchases in soy beans...As everybody's been looking at where the money's going right now, it's going into food," she said.
Hurley said rebalancing of the Dow Jones AIG commodities index has been impacting the markets. "Soy beans are expected to be weighted less, but they're supposed to be adding slightly more corn and wheat and crude oil," he said.
Scam of the Century
Bernie Madoff, self-proclaimed ponzi scammer, could be tossed in jail Monday if prosecutors get their way. The government is seeking jail for Madoff instead of detention at his apartment after he mailed jewels and other valuables to relatives.