6:46 AM
Focus will be on Egypt, earnings, jobs data
Addison Ray
By Caroline Valetkevitch
NEW YORK | Sun Jan 30, 2011 8:47am EST
NEW YORK (Reuters) - U.S. stocks may struggle to return to firmer footing next week if anti-government riots in Egypt destabilize the Middle East, keeping investors on edge.
Cautious trading could also come if earnings don't outperform and erode optimism about profits.
The government's January jobs report on Friday will highlight the week's economic data, as investors look to see if the unemployment rate continues to fall as it did in December.
Market volatility skyrocketed on Friday as indexes tumbled, with the VIX index .VIX, the market's fear gauge, up 24 percent, its biggest daily percentage jump since May 20.
Worries that Egypt's unrest could spread to other countries in the Middle East, home to the world's top oil exporters, caused investors on Friday to pull out of stocks and into bonds and other safer assets. U.S. crude futures settled more than 4 percent higher on Friday.
"As long as people are worried about political unrest in the Middle East, it will be weighing on the market," said David Kelly, chief market strategist for JPMorgan Funds in New York. "This story isn't just going to end overnight."
But "it could well turn out to be a short-lived correction, and it would be dangerous to try and time this thing," Kelly said, noting that his longer-term outlook for stocks remains bullish.
Analysts had been forecasting a pullback in the market for weeks, given the recent sharp gains, and said the Egypt news could be an excuse for some investors to sell.
The Standard & Poor's 500 index .SPX is still up 18 percent since the start of September, roughly when the current rally began.
The Dow Jones industrial average .DJI snapped an eight-week streak of gains with Friday's close, and the S&P 500 and Nasdaq also ended with losses for the week.
The Nasdaq fell more than 2 percent on Friday while the S&P and Dow both were down more than 1 percent.
SCOUTING BLUE CHIPS
Monday could see a bounce-back after Friday's losses, followed by more consolidation, said Matt McCormick, portfolio manager at Cincinnati-based Bahl & Gaynor Inc, which has $3.2 billion in assets.
"My recommendation for clients is that if you have profits, especially in lower-quality names that have benefited from QE2 (quantitative easing), now is the time to take profits and look at blue chip names that haven't gained as much," he said.
Among key support levels traders are eyeing are 1,271 and 1,263 on the S&P 500, according to Craig Peskin, co-head of technical analysis research at MF Global in New York.
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