Coming Week: Awaiting a Bottom

When will it end?

"I don't think we're done going down," says Byron Wien, chief market strategist at Pequot Capital Management. "I think we have a new wave of credit problems surfacing, and I think we're headed for a bottom, but we're not there yet. There's a realization that Fed easing isn't going to solve the problem by itself, that time is necessary, and housing and credit problems are beginning to affect the rest of economy."

"I think we'll reach bottom before the summer, but I don't think the economy will be improving until next year," Wien says.

Bill O'Donnell, rate strategist at UBS, says much of the financial-market risk lies in the hands of very few institutions, and they're all suffering from the same effects of the housing market. "It's unlikely we're going to see stability in the credit markets until we see home prices stabilize, because that's the genesis of all our ills," he says.

Therein lies a problem. Most analysts think stabilization of home prices is still a ways away. Hovnanian Enterprises(HOV) reports earnings on Monday, and Dominion Homes(DHOM) releases on Thursday, which will add to the raft of data in the sector.

No matter what those companies say, the numbers in the housing industry have been awful as of late, and most people aren't looking for a turnaround for months to come. Some people think there won't be a recovery until next year, which could make it even tougher for the overall market to stop the bleeding anytime soon.

"We're not looking to see improvement, just to see a bottom," says David Chalupnik, senior managing director at First American Funds. "Then we can become more constructive."

The major indexes continue to founder as the market tries to find its way. The S&P 500 ended Friday at 1293.37, off 2.8% over the week. The Dow industrials ended at 11,893.69, down 3% over the last five trading days, while the Nasdaq Composite finished at 2212.49, 2.6% lower on the week.

Many experts think the S&P 500, in particular, is hovering at a key level.

"With a market that is fairly deeply oversold right now, and in very bad psychological shape, a good contrarian investor would look for a little more weakness to this market -- below 1300 on the S&P 500, specifically -- and then start adding to positions," says Vinny Catalano, chief investment strategist at Blue Marble Research.

"I think in a technical sense, the S&P 500 is at a very critical level here at 1300," agrees Richard Sparks, senior equities analyst at Schaeffer's Investment Research. "That level held in January," and weakness below it into next week "would be indicative of more downside."

The S&P's flirtation with such lows is one reason some people think the end of the troubles may be near.

"We believe 1250 on the S&P would be the downside for pricing in a recession," Chalupnik says. "Then we should pretty much have this fully discounted ... . We're almost there."

The consumer price index will come out on Friday, and that could shed some more light on just how worrisome the market's situation is. If inflation is high, the Federal Reserve will have more trouble justifying the low interest rates that are intended to help repair the credit markets. Low rates make borrowing cheaper but can fuel price increases.

High commodity prices in particular have fueled inflation, but with the labor market and economy weaker, some of that pressure could be relaxed.

One possible bright spot next week could be the retail sector. In addition to government retail-sales data coming out on Thursday, a number of big retailers are reporting earnings. On Tuesday, J. Crew(JCG) reports. Wednesday brings such companies as American Eagle(AEO), Dillard's(DDS) and Men's Wearhouse(MW), while Thursday will feature Williams-Sonoma(WSM) and Aeropostale(ARO). Friday, Liz Claiborne(LIZ) and Ann Taylor(ANN) report.