Wall Street will open October with a busy week, highlighted by low expectations for global manufacturing data and the U.S. jobs report. Any positive surprises may help lift the market.
Spain is the wild card. And if it's played well, then the bulls might dance.
The S&P 500 <.INX><.SPX> finished its third positive quarter in the last four on Friday, despite suffering its largest weekly percentage decline since June. For the past three months, the S&P 500 gained 5.9 percent - its best third quarter since 2010. In contrast, the index was down 1.3 percent for the week.
The benchmark S&P 500 earlier this month reached its highest level since late 2007. Yet uncertainty remains over whether stocks can hold their gains against the headwinds of a struggling economy. That explains, in part, the retreat over the last several days.
The S&P 500 hit a high of 1,474.51 in mid-September before pulling back by a bit more than 2 percent. A run at 1,500 seems possible, but the flurry of economic and world events ahead probably will prevent a major advance in the coming week.
Bulls are betting that last week's Spanish budget proposals will be a preamble to a bailout request by Mariano Rajoy's government. The move would be seen as a first step to get the finances of the euro zone's fourth-largest economy in order and would clear some of the market uncertainty regarding the euro zone crisis.
Monetary policy is also on the list of market catalysts this week. Federal Reserve Chairman Ben Bernanke is scheduled to speak on Monday and the minutes of the latest FOMC meeting are set for release on Thursday. The week's agenda includes meetings of the European Central Bank, the Bank of England and the Bank of Japan.
Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin, said he believes "we could see a rebound" this week "if we get some of the stars aligning and have Spain ask for a bailout, the ECB announcing favorable terms for that bailout, and if we see the Bank of Japan announce further monetary intervention.
"If Spain and the ECB don't deliver, we could set ourselves up for a further lateral move in the markets," Jacobsen added. "A negative would be if Rajoy flat-out denies that they need a bailout."
The ECB and BOJ are set to meet on Thursday, with the Bank of Japan's meeting extending until Friday.
FACTORIES, JOBS AND THE U.S. ELECTION
Chinese factory and business conditions data will kick off a numbers-heavy calendar for markets. Manufacturing PMI, due on Monday, is expected to show a second straight month of contraction.
A snapshot of U.S. manufacturing activity will be provided on Monday when the Institute for Supply Management releases its September index. The September ISM reading is expected to show another month of contraction, but at a slightly slower pace than in August. On Wednesday, the ISM will release its U.S. services-sector Purchasing Managers' Index, which could show a slight deceleration in the pace of growth in the non-manufacturing sector.
"We have Chinese economic data over the weekend, and we'll see how markets react on Monday," said Wasif Latif, vice president of equity investments at San Antonio, Texas-based USAA Investment Management.
"It seems like the market is bracing for bad numbers, meaning if they're not as bad, it could be market-positive," Latif said.
Non-farm payrolls for September, due on Friday, are forecast to gain 115,000, while the U.S. unemployment rate is seen ticking up 0.1 percent from August to 8.2 percent in September.
The jobs data will come on the heels of the first of three U.S. presidential debates, scheduled for Wednesday night.
With just one month to go before election day on November 6, Wall Street will watch the economic data more closely than it usually does. In a year when the incumbent president is campaigning for a second term, the country's economic numbers tend to become more positive as election day approaches.
The U.S. stock market also tends to gain in years when incumbents are re-elected, according to the Stock Trader's Almanac.
For the year, the Dow Jones industrial average <.DJI> is up 10 percent, while the Standard & Poor's 500 Index <.SPX> is up 14.6 percent and the Nasdaq Composite Index <.IXIC> is up 19.6 percent.
Recent poll numbers point to a strengthening lead by President Barack Obama, but a weak payrolls reading could give some hope to Republican challenger Mitt Romney.
"If Romney doesn't turn the ship with a very strong (debate)performance, the president is going to win," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.
He said the trend in the polls has taken away some of the market uncertainty regarding the presidential election. He added that an ECB- or Spain-related headline out of Europe on Thursday could overcome almost anything that would happen Wednesday night during the debate.
"I think the market is coming to terms with the fact the president is ahead, and unless something significant changes, (he) will prevail."
(Wall St Week Ahead runs every Sunday. Questions or comments on this column can be emailed to: rodrigo.campos(at)thomsonreuters.com)
(Editing by Jan Paschal)