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MARKET SNAPSHOT: Market Still Facing Headwinds From Credit, Economy

By Carla Mozee

Investors will look for U.S. stock gains to continue for a second consecutive week, but the market faces high hurdles from the ongoing credit crisis and recession fears that continue to hang over the market.

Market players will turn their attention to results from retailing giant Wal-Mart Stores Inc. (WMT) and a consumer-price inflation report that will shed more light on consumer activity in a sluggish economy.

A close eye will also be paid to action in the bond-insurance market, after New York Governor Eliot Spitzer warned Thursday that bond insurers have to move quickly to recapitalize themselves to keep their AAA ratings.

Fresh off the central bank's downgrade of the U.S. economy, investors will return from Monday's holiday to reports from the beleaguered housing sector and results from J.C. Penney Co. (JCP) and tech heavyweight Hewlett-Packard Co. (HPQ)

A three-day snapback rally, interrupted by a sell-off on Thursday, was enough to pull the major stock indexes higher this week, but it wasn't enough to convince Joe Liro, equity strategist at Stone & McCarthy Research Associates, that the market is ready to extend gains.

"As soon as you got some upside, people came in to sell. When you're selling bounces rather than buying dips, that's a clear indication that the overall trend is lower," he said.

Wall Street also will watch for results from European banking firms, many of which have been hit by the U.S. mortgage meltdown.

While concerns about recession loom large on Wall Street, Liro said that he considers the weak performance of the financial sector as the most "debilitating" factor for the market.

If the constant "litany of admissions of bigger write-downs and charges continues, it's has to be a negative next week," he added.

Britain's Barclays PLC (BCS) will report on Tuesday and France's BNP Paribas , which has warned of lower fourth-quarter profit, will report Wednesday. This week, Swiss banking giant UBS AG (UBS) recorded a $13.7 billion write-down in the fourth quarter related to its extensive exposure to the U.S. mortgage market.

Results are also due from Societe Generale , the French bank in the middle of a rogue-trading scandal that is expected to result in more than $7 billion of losses at the company.

Steven Sachs, head of trading at Rydex Investments, foresees little chance that stocks will move higher next week, particularly if Wednesday's consumer-price index report shows that consumers shelled out more money for goods and services in January.

A miss in expectations for CPI readings to remain steady "given Federal Reserve Chairman Ben Bernanke's testimony on the Hill and [Treasury Secretary Henry] Paulson's claim that inflation is not a concern and it will moderate" would hit stocks, said Sachs, who met the monetary officials' view about inflation with skepticism.

Economists polled by MarketWatch forecast the CPI to remain unchanged at 0.3%. Stripping out volatile prices for food and energy, core consumer prices are expected to stay at 0.2%.

As investors prepped for the upcoming inflation report and highly anticipated results from Wal-Mart, the world's largest retailer, signs abounded that consumers (whose spending drives about 70% of the U.S. economy) are becoming increasingly reluctant to part from their cash.

Consumer-electronics retailer Best Buy Co. (BBY) cut its full-year earnings forecast Friday because of lackluster sales after the holiday season, then consumer sentiment tumbled to its lowest level since 1992, according to a survey by the University of Michigan and Reuters.

Those developments followed Bernanke's congressional testimony Thursday said that the central bank is projecting slower growth for 2008 than in previous forecasts. Investors will hear more from the Fed on Wednesday when minutes from its most recent meeting will be released.

Investors also will get a look on Friday at the Philadelphia Federal Reserve's manufacturing survey, whose poor showing last month set off alarm bells to many on Wall Street that recession was on its way.

"Bad news is we are probably going to be in a recession. The good news is that while rate cuts cannot stop a recession, they can help to reduce the severity," said Al Goldman, chief market strategist at A.G. Edwards. "But after the rally, the dominant trend is still down, and I think that's probably going to be the direction on balance next week."

Earnings, reports

Following the Presidents Day holiday on Monday, investors on Tuesday will receive results from Wal-Mart and look for further insight into how consumers are holding up during the current economic slowdown.

Wal-Mart is expected to report a 10% rise in profit to $1.02 a share on sales of $107 billion, according to analysts polled by Thomson Financial. But in its most recent sales release, the company posted a soft 0.5% gain in same-store sales for January, below expectations of 2% growth.

Chipmaker Analog Devices Inc. (ADI) will post results Wednesday. Utility firm PG&E Corp. (PCG) and financial-software provider Intuit Inc. (INTU) will report on Thursday.

Fourth-quarter earnings growth for companies in the S&P 500 continued to weaken this past week, and now stands at negative 21.1%.

"That was down mostly due to estimate cuts to American International Group Inc. (AIG)," said John Butters, senior research analyst at Thomson Financial.

The insurer reported that its auditor questioned how the company values some of its derivatives. AIG, however, said that it has appropriate controls and procedures in place to value such exposures.

Earnings growth is on track for the worst year-over-year decline since 2001. Of the 480 companies that already have reported results, 27% of them have missed Wall Street's estimates. That's above the long-term average of 20% of companies that post below than expected figures.

The National Association of Home Builders will release its home-builder sentiment index on Wednesday, and the Commerce Department will release its January report on building permits and housing starts. Housing starts are expected remain steady, with 1.01 million homes slated for construction.

Friday's market

The Dow Jones Industrial Average (DJI) ended down 26 points at 12,348.21, but posted a 1.4% rise for the week.

The S&P 500 Index (SPX) rose 1 point to 1,349.99 for a 1.4% weekly gain. The Nasdaq Composite Index (RIXF) fell Friday by 11 points to 2,321.80 but rose 0.7% for the week.

Treasury bonds mostly rose, putting yields under pressure, as investors fled to the safety of government debt on rekindled worries about the U.S. economy and the credit markets.

Crude-oil ended nearly flat at $95.50 a barrel on the New York Mercantile Exchange.

Gold for April delivery fell $4.70 to end at $906.10 an ounce, while platinum futures extended their record-breaking run Friday on persistent worries about supply disruptions in South Africa. Platinum for April delivery soared as high as $2,079.90 an ounce.