Markets are now "ridiculously correlated" with crude, said Jim Paulsen, chief investment officer at Wells Capital Management. "If we see oil going up to $150, the markets will no doubt have more pressure."
Crude surged more than 3% this past week to a new high above $145 a barrel. The price of oil has now doubled in less than a year.
As the market prepares for the onset of second-quarter earnings season next week, investors will watch for signs of weak demand from cash-strapped consumers as well as the impact of surging energy costs to gauge the impact on bottom lines.
On Thursday, U.S. stocks got some relief, with the Dow Jones Industrial Average closing up 0.7% at 11,288. The S&P 500 rose 1.3 points to 1,263, while the Nasdaq Composite fell 6 points to 2,245.
But in terms of the holiday-shortened week, the Dow still dropped 0.5% and it's down 20% from its Oct. 9 high of 14,165, putting the blue-chip index in bear-market conditions.
The Nasdaq, which fell 3% on the week, is in the same rut, now down 21.5% from its Oct. 31 high of 1,562.
Offering a slightly rosier assessment, the S&P 500 Index, which most Wall Strategists consider a more accurate gauge of the broader equities scene, remains a hair shy of the general definition of a bear market. It fell 1.2% in the week and is now down 19.2% from its Oct. 10 high of 1,562.
"If the price of oil continues to be at or above the current levels, the market is going to continue to go down," said Hugh Johnson, chairman of Johnson Illington Advisors.
Rallies in stock markets will be sustainable only when "investors collectively become more optimistic about the outlook for the economy and earnings," Johnson said. "I don't see anything that will happen next week that will change the outlook for the economy, which remains very gloomy."
On Friday, stocks got some help from the government's June employment report, which was more or less in line with market expectations, and it somewhat offset worries that the economy is getting worse. The Labor Department reported nonfarm payrolls dropped by 62,000 workers last month, while the jobless rate remained steady at 5.5%. .
But investors also contended with news from the Institute for Supply Management, which said the services sector of the U.S. economy contracted unexpectedly in June, falling to its lowest level since the start of the year.
The Labor Department next Thursday will report this week's jobless claim, which is also on investors' radar.
Financial stocks once again were among the week's worst casualties, thanks to a raft of gloomy research reports about them from various analysts. Morgan Stanley shares lost 2.2% this week and Merrill's shares slumped 4.8%.
Year to date, financial shares in the S&P 500 are down nearly 30%.
Bond insurer MBIA Inc. saw its shares fall 2.9% this week after the Wall Street Journal reported that it is selling municipal bonds to raise cash to meet payments. Moody's Investors Service recently downgraded MBIA.
But a few financial stocks bucked the trend. Tax-preparation firm H&R Block Inc. said it swung to fourth-quarter consolidated net earnings of $543.6 million, or $1.66 a share, compared to a net loss of $85.6 million , or 26 cents a share, in the year-earlier corresponding period. Its shares gained 4.8% on the week.
American Express Co. shares jumped 5.8% after being upgraded by UBS. And Lehman Brothers shares rose 2.7%, fighting off unconfirmed talk that it's battling liquidity problems.
Outside the financial sector, auto makers ran into another stormy week after they mostly reported anemic sales for the month of June.
General Motor Corp. hares slumped 12% after Merrill Lynch downgraded the stock to underperform from buy. Ford Motor Co. shares tumbled 11%, and Toyota Motor Corp. lost 2.5%.
Tech stocks were also battered this week. The latest main victim, Nvidia Corp.'s stock plunged 33% after the chipmaker trimmed its quarterly forecast.
Earnings on tap
Among the companies next week kicking off second-quarter earnings reporting are Alcoa Inc. , General Electric Co. , Marriott International .
Analysts surveyed by MarketWatch are expecting Marriott to earn 57 cents a share. Alcoa's is expected to post earnings of 81 cents a share, and General Electronic is expected to net 54 cents a share.
Separately, the National Association of Realtors will report May pending home sales next Tuesday. Analysts at Irwin Kellner expect home sales to drop 5%.
Illustrating ongoing stress in the nation's housing market as well as general economic weakness, the American Bankers Association reported Wednesday delinquency rates for home-equity lines of credit and bank cards climbed during the first quarter.
By Moming Zhou