WALL STREET WEEK AHEAD

WITH two weeks left in the trading year, the Eurozone debt crisis will remain the primary impediment to pushing the S&P 500 index into positive territory for 2011.

Uncertainty over progress in the region, along with the potential for credit rating downgrades on Eurozone countries, have kept investors on edge and market volatility high.

Even with a fairly busy US economic calendar, which includes a batch of data on the housing market, the final reading on gross domestic product and durable goods orders, markets will focus on developments from Europe.

“What everybody is going to look at is the same thing they’ve been looking at – every time a German official opens their mouth, we get crushed,” said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

“I’m keeping my fingers crossed that Santa Claus is out there. But we’ve got to see something.”

The benchmark S&P 500 index is down about three per cent for the year and would need to climb above 1,257.64 in order to end higher for the year.

A stocks’ rally on Friday fizzled, and the market ended with only modest gains after the latest credit warning about possible downgrades of European nations. For last week, the Dow fell 2.7 per cent, the S&P 500 lost 2.9 per cent and the Nasdaq slid 3.5 per cent.

Italy’s prime minister urged European policymakers on Friday to beware of dividing the continent in the effort to contain the debt crisis, warning against a “short-term hunger for rigor” in some countries, in a swipe at Germany.

Stocks have been whipsawed as investors weigh the threat from the Eurozone crisis against modest improvement in US economic data and stocks that many regard as cheap.

“There do appear to be some improving economic indicators domestically, but it’s hard to see how they win the day if Europe continues to be a big concern. It’s not like the valuations are at such bargain-basement prices that it becomes a one-way bet,” said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

As volumes begin to dry up and market moves become more exaggerated during the holiday period, the volatility may help lift the stock market into the plus column.

“Can you see an upside rally? Certainly, because you are going to have some asset managers in the end who are going to try and just push it so the market ends at the very least flat on the year, if not higher," said Ken Polcari, managing director at ICAP Equities in New York.

“If there is going to be a rally at all, it will happen on light volume because there will be fewer and fewer participants. When there is less volume, you do have the ability to have those exaggerated moves, but people will take advantage of that.”

Volatility in individual shares could also be affected by corporate earnings pre-announcements. There have been 97 negative earnings pre-announcements issued by S&P 500 corporations for the fourth quarter, compared with 26 positive pre-announcements, resulting in a negative-to-positive ratio of 3.7. That's the highest in 10 years, according to Thomson Reuters data.