NEW YORK (Reuters) – With Wall Street limping along through the summer doldrums, investors say they will remain on guard for more deterioration in what's expected to be a light-volume week.
The S&P 500 suffered losses last week and is in danger of falling further due to worries about economic data.
"The market is moving into a defensive posture coming into next week," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
"There may be some trepidation on the data that is coming out based on the data we saw (last) week that seems to indicate the economy could be deteriorating."
Even a pick-up in mergers and acquisitions was not enough to entice investors to get back into the market because of the dismal signs.
Potash Corp (POT.TO)(POT.N) searched for a white knight on Friday as BHP Billiton (BHP.AX) formally launched its $39 billion hostile offer for the world's largest fertilizer company.
The offer came on the heels of Thursday's deal by Intel Corp (INTC.O) to acquire software maker McAfee Inc (MFE.N) for $7.7 billion, fueling speculation more acquisition activity was on the horizon, which market participants noted may not improve the economic climate.
"The main goal of a merger is to cut costs which means they are going to be cutting jobs even more -- so is that necessarily a good thing?" said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
Anemic volumes on Wall Street recently -- including the lowest volume tally of the year on last Monday -- will also present another obstacle as they show apprehension by investors and are unlikely to improve without a significant catalyst.
According to Thomson Reuters data, 97 percent of S&P 500 companies have reported quarterly earnings, putting the attention squarely on economic data, including reports on the housing market, durable goods and the preliminary reading of gross domestic product.
The government's estimate of GDP is expected to show a 1.4 percent increase in the second quarter, down from the 2.4 percent rise estimated a month ago.
Disappointing initial jobless claims data and a dismal reading on manufacturing activity in the mid-Atlantic region on last Thursday have turned investors pessimistic, as the chorus warning of a double-dip recession grows louder.
On Friday, the S&P managed to close above the 1,070 level, viewed as a key technical support level as it represents both the August 16 low and the 50 percent Fibonacci retracement from the rally between July 1 and August 9.
"There is a critical point here -- if we were to close under that I would probably increase my hedges a little bit just to add some protection coming into the weekend here," said Mendelsohn.
Last week, the Dow fell 0.9 percent, the S&P 500 slipped 0.7 percent but the Nasdaq added 0.3 percent.
Data from Credit Suisse showed institutional investors had adopted a more defensive stance in the second quarter, increasing holdings in areas such as telecommunications and utilities along with food, beverage and tobacco -- a trend which could continue due to weak data, according to analyst Pankaj Patel.
"Usually there is some momentum so you would see a similar thing this quarter, depending on how this quarter turns out, they will slowly change it. It doesn't change quickly most of the time," said Patel, analyst at Credit Suisse in New York.
As August options expired on Friday, options investors are bracing for a quiet market this week. But M&A activities that have been gaining ground recently will continue to be in the spotlight.
"The big speculation for (this) week is who is next on the M&A front. That's going to be the big story and information everyone wants to know," Jud Pyle, chief investment strategist at PEAK 6 Investments in Chicago.
Options activity on U.S.-listed shares of Canadian fertilizer firm Potash Corp was one of the most active this week after it rejected a take over bid from BHP Billiton.
The CBOE Volatility index (.VIX), Wall Street's so-called fear gauge, was expected to stay below 25, suggesting a relatively calm market. Currently the index was trading up 1 percent at 26.71.
(Reporting by Chuck Mikolajczak; additional reporting by Angela Moon; Editing by Kenneth Barry)