The Week Ahead: Wall Street Watches Gustav

Gustav has unfurled a wall of worry for stocks in the week ahead.

The holiday-shortened week is also heavy with economic data that traders say is enough in itself to make the going rough, including the August employment report Friday.

Jobs data is the big economic headline for the coming week, but the calendar is full every day. On Tuesday, ISM manufacturing and construction spending are reported. Monthly auto sales, factory orders and the Fed's beige book on the economy are due Wednesday. The ADP employment report comes out Thursday, as do weekly jobless claims. Productivity and costs and ISM nonmanufacturing data are also reported that day.

But it's the hurricane that is keeping investors guessing. Gustav, at the start of the weekend, was slowly heading toward the central Gulf coast with an estimated landfall on Monday afternoon, just west of New Orleans, with the chance of arriving as anything from a category 2 to a category 4 storm. In its path was most of the oil and gas production infrastructure in the Gulf.

"That one is a wild card. You're at the mercy of mother nature ... Next week, we get back into the real world and all the excuses will be gone," Smalls said. Smalls said if Gustav hits as a strong hurricane, traders will be sizing up pretty quickly which stocks will be winners and losers, and which benefit or lose in an early cycle after a major storm and which feel the impact later. Building and construction typically get an early pop, he said.

Investors will also be watching the Republican convention, now that Sen. John McCain has made the surprise choice of Alaska Gov. Sarah Palin as his running mate. Traders do not expect the events to have market impact, but they do say the focus on the political arena will intensify as the presidential election nears.

August was not bad for stocks if you look at the indexes, but the trading volume was paltry in the he final week and traders are skeptical of some of the up days. The Dow rose 1.5 percent, its best month since April. The S&P 500 was up 1.2 percent, and the Nasdaq was up 1.8 percent. But it was the dollar that really shone in August, rising 6.32 percent against the euro, its biggest monthly gain against that currency ever.

The dollar gained as oil and other commodities slid. Oil regained some ground as Gustav emerged as a threat to the Gulf, but it is still down 7.3% for the month and is down 22 percent from its all time high of $147.27 per barrel set on July 11. Oil was trading above $117 a barrel in the Asian session Monday. chief strategic officer Scott Redler, whose specialty is technical analysis, said if Gustav is a major hurricane that causes oil to spike, stocks may be on track to test some key support. "If the storm is huge, and it's worse than expected, that could trigger the S and Ps to test the recent support area that's held for the last two weeks. That's the 1260 to 1265 area. If that gets broken, the market could retest its lows," he said.

But if Gustav is significantly weaker than expected, he thinks oil could "crater" and that of course, is a positive for stocks. Energy traders though are also watching Hurricane Hanna, which was just emerging as a possible threat to the Gulf. Aaron Studwell of Weather Insight said there was about a 40 percent chance that Hanna could track into the Gulf and head for the Alabama coast by next weekend.

Tony Crescenzi, chief bond market strategist of Miller Tabak, said he's particularly watching the jobs report. "We are on a path toward a much weaker economic situation than we saw in the second quarter, and we have to grapple in the next few months with whether this dark period is priced into the market or not. And the payroll report, in particular, will test whether that dark period is priced in," Crescenzi said.

"The market is expecting down 70,000. I think it could be more than 100,000 down because the (weekly) claims figure is suggesting 100,000 to 150,000 down," he said Crescenzi said it would make sense to see three very weak reports starting with Friday's numbers. "..with the idea that these job losses accelerate as the companies give in to the downturn." .

Earnings Central

There are a few important earnings reports in the coming week including Hovnanian and Toll Brothers which report Wednesday and Thursday respectively. Staples reports Wednesday. Ciena reports Thursday and National Semiconductor reports Friday.

Traders will be watching energy stocks carefully during the week, and Lehman Brothers holds a major energy conference in Manhattan Wednesday and Thursday.

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