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Investors are bracing for another volatile week

February's stock market so far has displayed more stability than January's, but Wall Street wants to see a stronger economy on the horizon before it trades confidently again.
/ Source: The Associated Press

February's stock market so far has displayed more stability than January's, but Wall Street wants to see a stronger economy on the horizon before it trades confidently again.

Investors are not counting on this week's readings on housing, inflation and manufacturing to give them that assurance. As a result, they are bracing for more volatility.

The market has been swinging higher and lower as traders sell off when disappointing economic data rolls in and then drive the market up when they snap up stocks that look like bargains. The pattern is indicative of a market that has underlying demand holding it up, but one that could have a bit further to fall if more bad news comes along.

After rallying early last week and then losing steam toward the end, the Dow rose 1.36 percent for the week, the Standard & Poor's 500 index gained 1.40 percent, and the Nasdaq composite index advanced 0.74 percent. All three indexes remain down sharply for the year, particularly the Nasdaq, which is 12.5 percent lower than it was at the end of 2007.

"We may not have hit the bottom, but people seem to be looking for things to buy rather than things to dump," said Alexander Paris, economist and market analyst for Barrington Research in Chicago. "Things might get worse before they get better, but you've got to buy stock when things look worst."

The question is whether there's any data coming in the near future that will have the power to reinvigorate the stock market back — or whether the market is doomed to a holding pattern until the economy starts to recover.

One overriding concern is the weak housing market. Though investors have come to terms with falling prices, there's uncertainty over how long the downturn will last and how much it will affect homeowners' spending patterns. And there are worries about the financial well-being of companies with investments in mortgage-backed assets.

All U.S. financial markets are closed Monday for the Presidents Day holiday.

On Tuesday, the National Association of Home Builders releases its housing industry index, which economists surveyed by Thomson Financial/IFR expect to show a decline for February. Then Wednesday, the Commerce Department reports on housing starts and building permits — both are expected to be weak.

Because of the housing market's deterioration, many businesses are suffering. The Institute for Supply Management's January manufacturing report showed modest growth, but economists predict that the Philadelphia Fed's regional manufacturing index will register another contraction. The decline is not expected to be as dismal as the December report, which caused the Dow to tumble more than 300 points a month ago, but if it is, it could send stocks reeling again.

Another worry is the inflation that is occurring alongside the economic slowdown. The dollar's recent tumble appears to have plateaued, but it is still weak, while food and energy costs are staying high. Consumers are finding themselves unable to spend money on discretionary items because the bulk of their wages is going toward necessities like meals, transportation and health care.

The Labor Department reports Wednesday on consumer prices, which economists predict ticked up 0.3 percent in January, the same rate as in December. Core consumer prices, which exclude food and energy costs, are anticipated to have risen by 0.2 percent.

Also Wednesday, the Federal Reserve releases the minutes from its Jan. 29-30 meeting. At that meeting, the central bank lowered the key interest rate by a half point to 3.00 percent and stated that the financial markets are still under considerable stress. The Fed also said credit is tightening for businesses and households alike, the housing contraction appears to be deepening, and the job market seems to be weakening.

"It seems to be, as the data unfolds, they'll have no choice but to cut further," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. He added, though, that given how much policy makers have already slashed rates and their persistent worries about inflation, "they don't have much more to go."

The Jan. 30 move followed an emergency three-quarter-point reduction a week earlier, and three cuts in the latter part of 2007. Rate changes tend to take at least six months to affect the economy. The Fed meets next on March 18.

For clues about how the Fed is feeling about the economy and its monetary policy going forward, investors will listen to speeches by Minneapolis Fed President Gary Stern, who is scheduled to speak Tuesday in Golden Valley, Minn., on the economy, and by St. Louis Fed President William Poole, who is speaking Wednesday in Kirksville, Mo., on inflation dynamics.