Signs of a Wall Street sell-off are all over the place, but U.S. stocks might well survive another week relatively unscathed if investors keep betting on sectors less vulnerable to an economic downturn.
Pressure for a correction in the stock market has been building up in the past few weeks as the euro and oil prices fell in tandem, knocking down shares of energy companies and dollar-sensitive multinationals.
Still, investors have averted a broad sell-off by diving into shares of companies that are less vulnerable to the economic cycle, including well-known defensive sectors such as utilities and household products, but also large-cap companies with steady earnings performance.
That strategy may hold the market afloat for a little longer. But with the end of the Federal Reserve's easy money policies just around the corner, investors are becoming more sensitive to risk in general.
"There is good reason for a pause, there is good reason to be conservative in here, and there is good reason to raise some cash ahead of a summer correction and a better buying opportunity," said Richard Ross, global technical strategist with Auerbach Grayson in New York.
The sharp sell-off in commodities markets earlier this month was seen by many as the first warning sign of a coming market correction. The U.S. dollar has been strengthening since then, in another sign that appetite for risk is dwindling.
Next month's end of the Fed's massive bond-buying program, also known as quantitative easing, is expected to knock down the value of stocks, commodities and the euro, a recent Reuters poll of 64 analysts and fund managers found.
Ross, who believes that a correction could come at any moment, warned that Wall Street remains close to multiyear highs as investors head into a traditional period of weak seasonality that stretches from May to November.
The Standard & Poor's 500 index has kept its year-to-date gain of 6 percent for the past two weeks, as defensive sectors such as utilities advanced while more volatile technology shares posted losses.
For the year, the Dow Jones industrial average is up 8.1 percent and the Nasdaq Composite Index is up 5.7 percent.
Despite the rotation between sectors, the S&P 500 has been trading in a narrow range between 1,330 and 1,340, indicating Wall Street's lack of direction. Most technical analysts agree that the market is poised to break out of that range soon — either with a sell-off or a rally.
Robert Sluymer, an analyst with RBC Capital Markets, said there is no technical evidence that the current market cycle has peaked. He recommended investors keep building exposure to defensive themes, while getting out of cyclical stocks.
Among the defensive sectors favored in the current environment, Standard & Poor's Equity Strategy recommended the stocks in the S&P 500 Consumer Staples Index. For the past week, this index was up 0.6 percent.
With the earnings season coming to a close, Wall Street will have just a sprinkling of marquee names set to release quarterly results this week. On tap are earnings from Campbell Soup, Costco Wholesale Corp and HJ Heinz Co , whose stocks are in the S&P 500 Consumer Staples Index. Polo Ralph Lauren Corp and Tiffany & Co are also set to release their results. These companies' outlooks could shed light on the consumer's mind-set and headwinds facing the retail sector.
As far as economic indicators are concerned, there is no data with overwhelming star power. The calendar includes new home sales for April, a second look at first-quarter gross domestic product, personal income and consumption for April and the final reading for May on consumer sentiment from the Thomson Reuters/University of Michigan Surveys of Consumers.
So investors could very well be at the mercy of the headlines from Europe, where fears about a possible debt restructuring by Greece are on the rise.
With the euro, commodities and stocks trading with extraordinary correlation, investors should look at the euro-dollar trade for direction, said Ross of Auerbach Grayson.
"If you continue to see the dollar strengthening," he said, "it should provide a headwind for commodities and for the S&P."