Coming Week: Don't Get Fooled Again

He says stock market valuation levels are attractive, and sentiment is negative; as a contrary indicator, this is bullish for stocks. The problem he points to is in the credit markets, where lending standards are tightening and interest rates are rising. Neither is good for growth.

"If lenders and borrowers don't trust each other, then the system can't work," says Darda.

Until the credit markets start to function correctly, Darda says, investors should consider Treasury inflation protected securities, or TIPS, which now yield close to 2% above inflation.

Other economic data points coming out include consumer confidence figures for July from the Conference Board on Tuesday, as well as the Chicago Purchasing Managers index for July, to be released Thursday. The PMI measures activity in the manufacturing economy, and analysts expect a reading of under 50, which indicates a shrinking sector.

From a technical analysis viewpoint, the broad stock market, as represented by the S&P 500, looks particularly oversold and could be ready for a bounce.

Only 37% of market participants are now bullish, says Rich Ishida, president of Pasadena, Calif.-based Market Vane. That's up from the 24-month low of 33% bullish on July 15. The normal range of bullishness is between 30% and 72%.

Ishida says the current stock market is "extremely oversold," and that should lead to a short-covering correction of up to two months in duration. More simply, a rally will likely be induced by speculators buying back shares they had previously sold short.

And of course, earnings season continues apace. With the bulk of the financial companies having reported, the key now is to look at the consumer staples such as Kellogg (K Quote) and Kraft Foods (KFT Quote), says Alan Gayle, senior investment strategist at RidgeWorth Investments in Richmond, Va.