A bounce could be in the cards for stocks next week as bulls defend a key technical level and managers buy the quarter's winners to prop up their books.
But gains coming from healthcare, staples or other defensive sectors that have outperformed the market in the last several months would only support the notion that the U.S. stock market needs to complete its correction phase and panic selling must occur before a more sustained comeback develops.
We want to see more fear, said Ari Wald, equity strategist at Brown Brothers Harriman in New York.
But be careful what you wish for.
The sources of the recent decline, including Greece's slow march toward a default on its debt, weak U.S. economic data and the creeping deadline to lift the U.S. debt ceiling, are far from being resolved.
HOLDING THE 200-DAY SHOWS THE WAY
Despite a drop that dragged the S&P 500 as much as 8.2 percent below its three-year high hit in early May, the index held above its 200-day moving average -- a major line in the sand as the bulls and bears battle for control of the market.
The slide had been telegraphed for weeks and the market's by-the-book performance -- pulling back to a widely followed level -- seems too well choreographed for some analysts.
The fact that we went to the 200-day ... seems just a little too perfect, said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.
He said the timing of the move was supportive, as the market creates a technical base before resuming its upward move on the back of strong earnings.
You might get an attempt at a shakeout move, Pado said. But sometimes the majority is right.
Even if they are right, they don't seem too convinced. So far this quarter -- on track to be the first in the red for the S&P 500 in the last year -- daily volume on the New York Stock Exchange, NYSE Amex and Nasdaq has averaged 7.22 billion shares.
That is down from the 7.94 billion shares traded daily during the first quarter, when the S&P 500 gained 5.4 percent. Commitment to the market has waned. The frantic selling, the flushing down of day traders seems absent so far in this corrective phase.
Despite holding above that level, the market has not cleared the danger zone of dipping under its 200-day average. The curve has a steep slope, as the S&P 500 took roughly two years to notch a 100 percent advance from its March 2009 lows.
The 200-day moving average now stands at 1,263.47, less than 0.4 percent below the S&P 500's close on Friday.
Every time you test a resistance or support level, you make it weaker, said Nicholas Colas, chief market strategist of the ConvergEx Group in New York. It's almost like a piece of metal. Every time you hit it, it grows more fragile and that's why people are really worried the third or fourth time.
After three straight days of declines, the S&P 500 fell 0.24 percent for the week and finished at 1,268.45 -- its seventh decline in the last eight weeks.
The Dow industrials <.DJI> lost 0.58 percent for the week, closing on Friday at 11,934.58, while the Nasdaq Composite <.IXIC> rose 1.39 percent for the week to end at 2,652.89.
The next two weeks, before quarterly earnings season starts in earnest, could be marked by wild swings like the ones seen recently. On Thursday, after a market-friendly headline out of Greece, the S&P 500 posted its strongest comeback in almost a year, on days when the benchmark has fallen more than 1 percent.
From its session low on Thursday, the S&P 500 climbed more than 20 points into the close. The Dow's swing covered 233.79 points from its intraday low to session high on Thursday.
But buying interest waned on Friday. Aside from doubts about the passage in Athens' Parliament of higher taxes and service cuts, weak Italian banks also are scaring investors.
The Federal Reserve on Wednesday gave a bleak outlook on the economy, lowering its forecasts for GDP growth for both 2011 and 2012. And Fed Chairman Ben Bernanke found it hard to explain the sources of a so-called economic soft patch that seems to have become pervasive.
SUMMER STORM OF DATA
Besides the weekly jobless claims numbers, housing and manufacturing data will attract the most attention next week.
The S&P Case-Shiller April home prices index on Tuesday and the National Association of Realtors pending home sales for May on Wednesday could confirm the housing market's double dip.
Factory activity grew in May at its slowest pace since September 2009, according to the Institute for Supply Management, and Friday's ISM number for June is expected to drop to 51.9, indicating an even slower rate of growth.
New applications for unemployment insurance on Thursday are expected to land above 400,000 for a 12th straight week, according to economists polled by Reuters.
Personal income and consumption, out Monday, are expected to tick higher in May. Consumer confidence, out Tuesday from the Conference Board, is forecast at a June reading of 60.5, just a touch lower than May's 60.8, a Reuters poll showed. Despite a recent string of weak data in May, a sharp drop in crude oil prices is expected to buoy consumer confidence.
(Reporting by Rodrigo Campos; Additional reporting by Edward Krudy; Editing by Jan Paschal)