(Reuters) – After ugly economic data and an unexpected downturn in sentiment on quarterly earnings, Wall Street will face a tough time battling back from the latest sell-off.
Technology and banking results will once again shape investor mind-set in a week dominated by a blitz of quarterly earnings.
But it will be a tough job to shift back into a positive mode after stocks dropped nearly 3 percent on Friday.
Minutes of the Federal Reserve’s June meeting got the market seriously worried last week after officials said they were more concerned with the pace of the economic recovery.
A raft of disappointing data on consumer sentiment and factory activity did not help, prompting questions last week on whether the economy had merely hit a soft patch or was primed for a double-dip recession.
“It doesn’t mean the market can’t rally, but the structural problems are there and there is no doubt about it,” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
From a technical perspective, the picture is even less certain. The Standard & Poor’s 500 Index .SPX is stuck in a tight range after it failed to hold its 50-day moving average, now near 1,090, after closing above it for two days.
The Nasdaq Composite .IXIC, meanwhile, failed in its attempt to break its 200-day moving average, but has support around its 14-day moving average at 2,171.
For the past week, the Dow Jones industrial average .DJI lost 1 percent, while the S&P 500 slid 1.2 percent and the Nasdaq shed 0.8 percent.
This week’s earnings will include results from 12 Dow components, as well as quarterly scorecards from financial powerhouses Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), along with tech bellwethers Apple Inc (AAPL.O), Texas Instruments Inc (TXN.N) and Qualcomm Inc (QCOM.O).
For the second quarter, earnings are expected to increase 28 percent from the year-ago period, according to Thomson Reuters data.
This week, investors will also hang on the words of Federal Reserve Chairman Ben Bernanke when he gives his semi-annual testimony on the economy and monetary policy to members of two congressional committees. He will appear before the Senate Banking Committee on Wednesday — the same day that President Barack Obama will sign the massive Wall Street regulatory reforms into law. On Thursday, Bernanke will speak to the House Financial Services Committee.
Fireworks, if any, may come during the Fed chief’s question-and-answer sessions with members of Congress.
WILL HOUSING FIND A FLOOR?
The week’s major economic indicators will zero in on the housing sector, which is still struggling in the wake of the worst recession since the 1930s. In the second quarter, banks repossessed a record number of U.S. homes as unemployment stayed high, according to RealtyTrac, a real estate data company.
On Tuesday, Wall Street will get data on housing starts for June, which are expected to slip to a seasonally adjusted annual pace of 580,000 units from 593,000 in May, according to economists polled by Reuters.
Another snapshot of the housing market will come on Thursday with existing home sales for June. The forecast calls for a drop of 8.1 percent in June versus the 2.2 percent decline in May, the Reuters poll showed.
REVENUES ON ‘MOST WANTED’ LIST
But the week’s main event will be earnings. Close attention will be paid to revenues for signs of improvement, in light of the contrasting results from Intel Corp (INTC.O) and Google Inc (GOOG.O).
“That’s been the problem. They’ve been meeting or exceeding on cost cutting and not on demand for their products,” said Terry Morris, senior vice president and senior equity manager for National Penn Investors Trust Company in Reading, Pennsylvania.
“That has got to end pretty soon because the market was expecting sales to start improving and it’s not materializing.”
According to Thomson Reuters data through July 16, 48 companies in the S&P 500 Index have reported earnings for the second quarter, with 75 percent having topped analysts estimates, 13 percent in line with expectations and 13 percent below expectations.
On a revenue basis, of the 48 companies in the S&P 500 that have reported results so far, 71 percent have topped analysts’ expectations and 29 percent have fallen below estimates.
TECHS MAY FACE LESS TURBULENCE
Options investors appear to be expecting less volatility in the technology sector than the broader market this week.
Implied volatility on the at-the-money options for the SPDR S&P 500 ETF (SPY.P), an exchange-traded fund that tracks the benchmark S&P 500 .SPX, was slightly higher than on the PowerShares QQQ Trust ETF (QQQQ.P) that tracks the performance of the Nasdaq 100 .NDX, according to Steve Claussen, chief investment strategist at online brokerage OptionsHouse.com.
Implied volatility, a key component of options prices, measures the expected movement in stocks calculated by options prices. It is also seen as a barometer of anxiety.
“It’s notable that QQQQ is showing less implied volatility, which suggests more movements in the broader market than the straight technology sector. The tech sector will be a less exciting place in terms of movements (this) week,” he said.
Implied volatility on August options for the S&P 500 ETF was 25.5 percent, slightly higher than 25.25 percent for the Nasdaq ETF. Usually, the Nasdaq ETF has an implied volatility that is 5 percent to 10 percent above that of the S&P 500 ETF.
The most actively traded options on the S&P 500 ETF were the August $100 and $105 puts, excluding July options that expire at the end of the day. Late Friday, the SPDR S&P 500 ETF was down 2.8 percent at $106.63.
For the QQQQ, the highest volume was on the August $44 put and August $45 call options. On Friday, the ETF was down 2.78 percent at $44.34.
(Reporting by Chuck Mikolajczak; Additional reporting by Angela Moon and Rodrigo Campos; Editing by Jan Paschal)