US stocks are unlikely to break above a key technical level next week unless monthly jobs data and consumer company results paint a more promising picture of the recovery.
The Standard & Poor's 500 index has been stuck near its 200-day moving average, a level used to determine market direction, amid recent weak economic data and disappointing outlooks from companies, including tech firms Nvidia Corp and Symantec.
Options market activity points to more tech sector volatility next week, while the Nasdaq had the poorest performance of the three major indexes this week.
Among companies expected to report next week are Procter & Gamble and Clorox whose results could give another glimpse into the strength of consumer spending or its lack.
But the government's non-farm payrolls report, due Friday, looms large since sluggish job growth is considered the biggest hurdle to advances by the economy and stocks.
The Labor Department report follows data Friday that showed the pace of US economic growth slowed in the second quarter. The June labor report showed a fall in payrolls, both of which raised concerns about the recovery for the rest of the year.
"We have been reducing our exposure to equities because we are concerned that a weaker economy is going to continue throughout the end of year," said Joseph Battipaglia, market strategist, Stifel Nicolaus, Yardley, Pennsylvania.
Key technical break
Analysts say a significant break above the S&P 500's 200-day moving average, currently around 1114, would be a bullish signal.
"The market has the potential to push higher again if we can get through the 200-day moving average," said Michael Sheldon, chief market strategist, RDM Financial, Westport, Connecticut.
Chris Burba, short-term market technician at Standard & Poor's in New York, noted that the 200-day moving average has been nearly flat since late June, which supports the view that investors should be cautious.
The US economy has shown weakness in recent months after a recovery from the worst recession since the 1930s, and corporate results for the second quarter have been mixed.
Earnings growth for S&P 500 companies in the second quarter is expected at 36 per cent, while revenue growth is seen at about 9.1 per cent, according to Thomson Reuters data.
Options investors appear to be expecting more volatility in the technology sector, which has heavily weighed on the market this week, to continue.
The most active options on PowerShares QQQ Trust ETF, an exchange-traded fund that tracks the benchmark Nasdaq 100, was the weekly put options at the $US45 strike which expire on Aug 6. Weeklys are options listed with approximately one week to expiration, different from traditional options that have a life of months or years before expiration.
"Puts are dominating in the QQQQ, both in weeklys and regulars," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio.
Regular put options at the August $US45 and $US46 strikes were also seeing heavy volume. The ETF is currently down 0.4 per cent at $US45.55.
Some options market analysts see more range-bound trading ahead, with top end at 1120 on the S&P 500 and the bottom end at 1065.
"In order to take out the upside of the trading range, we need to see the majority of economic data next week to be better than expected," said Stifel Nicolaus options market strategist Elliot Spar in Shrewsbury, New Jersey.
In other key economic data next week, the Institute for Supply Management's manufacturing report, due Monday, is expected to show growth for a 12th straight month.
Reuters