Investors expect another volatile set of trading sessions next week, as they keep their sights pinned on decisions emerging from Washington and clues about how poorly the economy is faring.

Last week brought several trading days of bottom-searching and dead-cat bounces, as the Dow Jones Industrial Average traveled in a range of 1,265 points, from its high end to the low. The bears ultimately won, and the index closed out the week with a loss of more than 440 points, or 5%.

Several regulatory factors may come into play next week, as lawmakers grapple with how to handle the fate of troubled automakers GM ( GM), Ford ( F) and Chrysler, and the Federal Reserve considers even further cuts to its key rate target.

The Fed embarked on a massive rate-cutting campaign last year, but held off over the summer as inflation surged amid rising commodity prices. Now that crude oil and other commodities have come down tremendously, deflation is the concern, making further interest-rate cuts a more palatable option.

That is especially true since interest rates for consumer loans, whether on mortgages or credit cards, have remained stubbornly high.

"Oh yeah, without a doubt," says Kevin Shacknofsky, co-portfolio manager of the Alpine Dynamic Dividend Fund, when asked whether the Fed is likely to slash its rate further from the current 1% target. "We're going to get further cuts until we get to zero."

Two key indicators next week will provide evidence of whether the economy is officially in a deflationary setting yet. The producer price index will be released by the Commerce Department on Tuesday, followed by the consumer price index on Wednesday.

Housing starts to be released on Wednesday may also give clues about how hard homebuilders are working to correct drastically high inventory levels, though Shacknofsky notes that housing data are seasonal, with the market placing more emphasis on what happens in the spring.

Poor retail data weighed on stock prices last week, and Len Blum, managing director for Westwood Capital, notes that some retailers will be reporting earnings next week, as well. Blum expects negative news from home-improvement store operators Lowe's ( LOW) and Home Depot ( HD), though the discounter BJ's ( BJ) may have some positive news as consumers flock to bargain stores.

But even that may not be the best of news for the U.S. economy. "I think what's driving the market is that the American consumer -- who has seen the value of his home fall dramatically, is losing his job, seeing the value of stock holdings decline -- is shell shocked," says Blum. "I think the consumer is pulling way back, and it's going to be worse than we fear."

Another factor lurking in the distance is whether technical trades and forced liquidations by hedge funds and mutual funds have run their course. Judging from Thursday's last-minute 500-point rally, Marian Kessler, co-portfolio manager of the Becker Value Equity Fund, suspects not.

"Was that short covering?" she asks. "It's certainly a possibility that it was a technical rally. It certainly was a low-quality rally. You don't really know what kind of manipulation is going on in the markets, and technical trading seems to still be playing a role."

Kessler has taken advantage of the market volatility, booking profits over the summer, then using that cash to buy out-of-favor stocks last month at what she calls "bargain-basement prices." But she notes that the economic outlook, especially concerning retail sales is "grim," even if positive news comes out of Washington next week as Congress considers a stimulus package, an automaker bailout and other emergency measures during its lame-duck session.

Shacknofsky expects further volatility ahead. "These good days that we're having are dead-cat bounces or rallies in the bear market," he says. "And whenever it gets some strength, you'll just see the market sell into it."
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