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U.S. stocks to get no rest, remain volatile

Week capped by Bernanke’s Jackson Hole speech on Friday

SAN FRANCISCO — U.S. stock markets face a bleak, volatile trading week, as investors brace for more data illustrating subpar economic growth and the low likelihood of another rescue package from the Federal Reserve.

“We’re into the dog days of summer,” said Michael Sansoterra, portfolio manager at Silvant Capital Management in Atlanta. “We’re not expecting a lot of change next week, no surprises.”

That doesn’t bode well for U.S. stocks, which have been battered by unusually high volatility and fears of a double-dip recession.

The Dow Jones Industrial Average DJIA -1.57%   shed 4% in the past week, for an 11% loss in August. Similarly, the S&P 500 Index SPX -1.50%   dropped 4.7% on the week for a 13% loss in August, and the Nasdaq Composite Index COMP -1.62%   dove 6.6% for the week for a 15% August haircut.

This week’s economic indicators include the Chicago Fed National Activity Index on Monday, and July new home sales on Tuesday. On Wednesday, July durable-goods orders and core capital-goods data are released, along with home-price index data for June. Then on Friday, the Commerce Department will revise its second-quarter GDP data. See MarketWatch's economic calendar.

Also on Friday, Fed Chairman Ben Bernanke is scheduled to speak in Jackson Hole, Wyo., at an annual conference of central bankers. At the same meeting last year, Bernanke signaled plans for a second round of quantitative easing, or QE2, setting off a months-long rally in stocks.

Brian Peery, co-portfolio manager at Hennessy Funds, said it’s going to be a bumpy ride for stocks for the next few weeks. He expects “moderate at best” housing and GDP revision data showing subpar economic growth.

‘Other arrows in their quiver’

As for Jackson Hole, Peery doesn’t think a third round of quantitative easing is in the central bank’s game plan.

“The Fed still has other arrows in their quiver other than QE3: They can buy long-dated Treasuries to flatten he yield curve or cut interest on bank deposits held at the Fed to encourage more lending,” he said. “Personally, I would be very surprised if they pull out the QE3 arrow. You never know though, I was surprised last week that they included the 2013 language.”

Earlier in the month, the Fed in its Federal Open Market Committee statement said it was likely to keep rates “exceptionally low” until at least mid-2013, a move that was opposed by three regional Fed presidents.

Silvant’s Sansoterra further downplayed the upcoming Jackson Hole meeting, saying not much of import would come out of it. “The 2013 date is as much hoopla as we’re going to get,” he added.

Sansoterra expects weak economic data will come as no surprise and volatility will persist until we gain more clarity on how sovereign-debt issues in Europe are going to impact the United States.

Worries about Europe compounded some disappointing U.S. data releases to drag stocks lower in the past week.

This Week's Key Events: Second-Quarter GDP Revision Looms Large

Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

There are no major economic releases scheduled for Monday. Focus Media Holding (FMCN), Perfect World (PWRD), Sky-mobi (MOBI), and Suntech Power (STP) are expected to report earnings.

Tuesday

Tuesday's economic calendar features new home sales for July, along with the Richmond Fed's manufacturing index for August. On the earnings front, we'll hear from Daktronics (DAKT), H.J. Heinz (HNZ), Medtronic (MDT), Melco Crown Entertainment (MPEL), Trina Solar (TSL), and Williams-Sonoma (WSM).

Wednesday

Durable goods orders for July are due out on Wednesday, as well as the regularly scheduled update on petroleum stockpiles. Notable earnings reports include American Eagle Outfitters (AEO), Applied Materials (AMAT), Collective Brands (PSS), Express (EXPR), Guess (GES), and Toll Brothers (TOL).

Thursday

Thursday brings our usual weekly report on initial and continuing jobless claims. Aruba Networks (ARUN), Big Lots (BIG), Cyberonics (CYBX), Hormel Foods (HRL), Pandora Media (P), and Sanderson Farms (SAFM) will share the earnings spotlight.

Friday

The economic calendar ends with a bang on Friday, with all eyes turning to Jackson Hole and Fed Chairman Ben Bernanke's highly anticipated speech on "Near- and Long-Term Prospects for the U.S. Economy." Also slated to hit the Street are the Commerce Department's revised estimate of second-quarter gross domestic product (GDP), and the final Thomson Reuters/University of Michigan consumer sentiment index for August. Tiffany & Co. (TIF), Frontline (FRO), and Madison Square Garden (MSG) close out a relatively light week of earnings.

And now a few sectors of note...

Dissecting The Sectors

Sector

Large-Cap Tech

Bearish

Outlook: Tech earnings were an inescapable black cloud this past week. Sector stalwarts such as Dell (DELL) and Hewlett-Packard (HPQ) were hammered after their respective quarterly reports, and bleak guidance from the likes of Blue Coat Systems (BCSI) and NetApp (NTAP) also weighed heavily on the group. From a technical standpoint, the PowerShares QQQ Trust (QQQ) spiraled lower after a recent test of the $60 level -- which represents exactly half its all-time high of $120, set back in March 2000. Furthermore, the trust peaked this past week at $54.42, within four pennies of its 2010 close at $54.46. Going forward, this year-to-date breakeven line could emerge as another layer of resistance for QQQ. Semiconductor stocks could prove to be a particular pocket of weakness, as analysts remain surprisingly upbeat on this underperforming group. The percentage of "buy" ratings on components of the Semiconductor HOLDRS Trust (SMH) peaked at 58.2% in late July, hitting its highest level since May 2010. Meanwhile, the percentage of "sells" is resting near an annual low. In the same optimistic vein, a few analysts have flagged the poor price action in chip stocks as a buying opportunity. With SMH faring even worse than the broader QQQ in 2011, this defiantly bullish attitude suggests that semiconductors could be vulnerable to a shift in sentiment as the weak technical performance continues.

Sector

Financials

Bearish

Outlook: Banks continue to struggle, due to lingering uncertainty about European debt exposure and new warnings about the rising threat of recession. On the charts, the Financial Select Sector SPDR (XLF) is hovering near its recently tagged two-year low of $12.04, and is now sitting on a year-to-date drop of about 24%. However, media coverage on the group is still bullishly slanted, with pundits pointing to "attractive valuations" in the wake of recent declines. Likewise, data from Zacks indicates that more than 61% of analyst ratings on finance stocks are of the "buy" or better variety, despite the group's dismal price action and mounting fundamental challenges. This stubbornly bullish configuration leaves plenty of room for additional downgrades going forward. Plus, we've recently observed deep out-of-the-money put buying on names like Citigroup (C), Bank of America (BAC), and Morgan Stanley (MS). This could be a sign of heightened trouble for the group if this is smart money at work.

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