Beaten-up investors go into September, historically a weak month for stocks, facing key reports on jobs, manufacturing and services. If those disappoint, the S&P 500 could breach technical support levels, pushing stocks yet lower.
The S&P 500 index has fallen nearly 13 percent since April as investors fret about the chance of a double-dip recession. But the index has found solid support around the 1,040 level, with a sustained move below that proving tough.
Federal Reserve Chairman Ben Bernanke boosted stocks on Friday by signaling the Fed is ready to act if the economy worsens. But more weakness in upcoming indicators like non-farm payrolls and Institute for Supply Management surveys would intensify fears the economy is sliding back into recession.
"There is this continual trend toward numbers falling short of expectations," said Nick Kalivas, equity analyst at MF Global in Chicago. "My guess is you'll see some selling come in again this week on these numbers."
The non-farm payroll report coming on Friday is expected to show 99,000 jobs were lost in August, swollen by redundancies among temporary census workers, while private sector hires grew by only 42,000.
Both the manufacturing and services sectors are expected to have experienced another slowdown in growth in August. The ISM manufacturing report is released on Wednesday, followed by the services-sector report on Friday.
The S&P 500 tested the 1,040 level twice during the past week, both times ending the day with gains. The level has consistently attracted buyers over the past 10 months and was significantly breached only once during a brief period in July.
"Here we are sitting at this important support level, having pulled back 8 percent (on an intraday basis) in three weeks, you potentially set up for a reversal," said Richard Ross, global technical strategist at Auerbach Grayson in New York.
The benchmark Standard & Poor's 500 index finished last week at 1,064 on Friday. If the 1,040 level is breached, the S&P 500 could fall into a lower range around 1,020 to 1,010. However, the index runs into resistance at its 14-day moving average at 1,076.65, providing only limited scope on the upside.
Investor sentiment remains negative. In the options market, investors bought S&P 500 puts, giving them the right to sell S&P futures at a fixed price, although the most actively traded option on the S&P 500 (SPY.P) ETF was the $107 call, suggesting some bullish trades ahead of next week.
"Overall investor sentiment in the option market has become very skeptical, with put buying widely exceeding call purchases," said Ryan Detrick, technical senior analyst at Schaeffer's Investment Research in Cincinnati.
The put-to-call ratio, a measure of investor sentiment, was at 0.61 as of Thursday's close compared to a 21-day ratio of 0.59.
Investors will be closely following comments from executives at big industrial companies like General Electric and Boeing at Morgan Stanley's Global Industrials Unplugged Conference this week.
Intel Corp. cut its third-quarter revenue estimates in a surprise on Friday. Although investors shook off the news after an initial fall, bleak outlooks from large corporations at the heart of the economy could rattle investors.
As usual there will be a series of secondary labor market data playing second fiddle ahead of the Friday's jobs number. ADP's jobs report on Wednesday is expected to show the private sector added 18,000 jobs in August, down from 42,000 in July.
Weekly claims for jobless benefits are tipped to remain solidly elevated on Thursday, edging up to 475,000 compared to 473,000 the week before.
With significant risks on the horizon, many investors may think twice about getting into the market at the start of September, historically the worst performing month for all three major indexes.
That may be especially true given the three-day break in the U.S. for Labor Day, with markets closed on Monday, September 6.
Scott Marcouiller, chief technical market strategist at Wells Fargo Advisors in St. Louis, said he found it hard to envision a rally in the current environment.
"Right now the market is locked into short-term thinking," he said.
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