Investors bracing for more volatility

February’s stock market so far has displayed more stability than January’s, but Wall Street wants to see a stronger economy on the horizon before it trades confidently again.

Investors are not counting on this week’s readings on housing, inflation and manufacturing to give them that assurance. As a result, they are bracing for more volatility.

The market has been swinging higher and lower as traders sell off when disappointing economic data roll in and then drive the market up when they snap up stocks that look like bargains. The pattern is indicative of a market that has underlying demand holding it up, but one that could have a bit further to fall if more bad news comes along.

After rallying early last week and then losing steam toward the end, the Dow rose 1.4% for the week, the Standard & Poor’s 500 index gained 1.4% and the Nasdaq composite index advanced 0.7%.

All three indexes remain down sharply for the year, particularly the Nasdaq, which is 12.5% lower than it was at the end of 2007.

The question is whether there are any data coming in the near future that will have the power to reinvigorate the stock market -- or whether the market is doomed to a holding pattern until the economy starts to recover.

One overriding concern is the weak housing market. Though investors have come to terms with falling prices, there’s uncertainty over how long the downturn will last and how much it will affect homeowners’ spending patterns. And there are worries about the financial well-being of companies with investments in mortgage-backed assets.

All U.S. financial markets are closed today for the Presidents Day holiday.

On Tuesday, the National Assn. of Home Builders releases its housing industry index, which economists surveyed by Thomson Financial/IFR expected to show a decline for February. Then Wednesday, the Commerce Department reports on housing starts and building permits. Both are expected to be weak.

Because of the housing market’s deterioration, many businesses are suffering. The Institute for Supply Management’s January manufacturing report showed modest growth, but economists predict that the Philadelphia Fed’s regional manufacturing index will register another contraction. The decline is not expected to be as dismal as the December report, which caused the Dow to tumble more than 300 points a month ago. If it is, it could send stocks reeling again.

Another worry is the inflation that is occurring alongside the economic slowdown. The dollar’s recent tumble appears to have plateaued, but it is still weak, while food and energy costs are staying high. Consumers are finding themselves unable to spend money on discretionary items because the bulk of their wages is going toward necessities such as meals, transportation and healthcare.

The Labor Department reports Wednesday on consumer prices, which economists predict ticked up 0.3% in January, the same rate as in December. Core consumer prices, which exclude food and energy costs, are anticipated to have risen by 0.2%.

Also Wednesday, the Federal Reserve releases the minutes from its Jan. 29-30 meeting.

At that meeting, the central bank lowered the key interest rate by a half point to 3%.

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At a glance

Today

U.S. financial markets closed for Presidents Day.

Tuesday

Quarterly earnings reports due from Hewlett-Packard Co., Medco Health Solutions Inc., Medtronic Inc., OfficeMax Inc., Wal-Mart Stores Inc., Whole Foods Market Inc.

Wednesday

Commerce Department reports on housing starts.

Labor Department reports on consumer price index.

Federal Reserve’s Federal Open Market Committee releases minutes of its Jan. 29-30 meeting.

Quarterly earnings report due from TJX Cos.

Thursday

Labor Department reports on weekly jobless claims.

Freddie Mac reports on mortgage rates.

Conference Board releases its index of leading U.S. economic indicators.

Quarterly earnings reports due from Intuit Inc., J.C. Penney Co., MGM Mirage Inc., Morningstar Inc., Safeway Inc., Newmont Mining Corp., Zale Corp.

Source: Associated Press