Stocks could be volatile but not in correction yet

The tug of war between better economic news and the potential for rising interest rates could continue to simmer in the background in the week ahead, keeping stocks volatile. Traders will

also focus on the whole list of situations that have been unnerving markets, including Europe's economy, Argentina's default, tensions between Russia and Ukraine and the Israeli

incursion into Gaza. The overriding concern, however, had been the idea that the Fed could move to raise rates sooner than expected, fueled in the past week by stronger 4 percent

second-quarter GDP growth and the first signs of higher wages and inflation in second-quarter data. Meanwhile, news on Sunday that Portugal will spend 4.9 billion euros ($6.58 billion) to

rescue its largest listed bank Banco Espirito Santo is helping U.S. stock futures higher. Strategists broadly don't see a deep selloff, even with the Dow's 2.8 percent decline in

the past week that erased the its gains for the year. The fell 2.7 percent to 1,925, in its worst weekly performance in two years, and it is now 3.3 percent off the high it set on July 24.

Traders work on the floor of the New York Stock Exchange, August 1, 2014, in New York. Getty Images Read More Stock market selloff ahead but not panic, pros say "I wouldn't be

surprised if the peak to trough correction in the S&P is around 6 percent. If you go over the last few years and see the type of pullbacks we've had in these situations, 6 percent

seems to be a place that has brought cash off the sidelines," said Art Hogan, chief market strategist at Wunderlich Securities. Stocks sold off sharply Thursday and were also lower

Friday, but recovered their worst losses were before the close. The Nasdaq was down 2.2 percent for the week at 4,352, and the Russell 2000 was off 2.6 percent at 1,114. "There's

not much momentum for a sustained selloff. I don't think it will last that long unless there's another catalyst," said Dan Suzuki, senior equity analyst at Bank of America

Merrill Lynch. Traders will keep their focus on earnings but also economic reports that will either impact GDP or provide more information on potential wage pressures. Stocks wobbled and

Treasury yields rose after Thursday's employment cost index showed a jump of 0.7 percent in the second quarter, the fastest pace in six years. Yields at the short end of the curve,

which reflect traders bets on Fed funds moves, hit multi-year highs in the past week but gave up gains Friday. The July jobs report, released Friday morning, showed the economy added 209,000

jobs and that wages were steady. Payrolls were a bit lighter than expected but the report soothed markets in that it was not too hot a number, nor did it show wage pressures. The latest

reading Friday on the Fed's preferred measure of inflation showed a steady low pace. The personal consumption expenditure price index was up 1.6 percent in June — below the Fed's 2

percent target. That also helped chill expectations for a rate hike. "From my perspective, where you need to be looking at the end of the week is central bank policy out of Europe, and

the unit labor costs out of the U.S. since there is a such focus on wages and labor costs," said Robert Sinche, global strategist at Pierpont Securities. Productivity and costs are

reported Friday morning, and international trade is reported Wednesday. That is a potential swing factor for second-quarter GDP. Read MoreEuropean weakness is an issue for stock market The

European Central Bank meets Thursday, as does the Bank of England. Euro zone inflation, reported at 0.4 percent, is at a cycle low and sparked concerns in the past week of deflation. "A

lot of times what you see is dovish rhetoric from the ECB and steady as she goes from the Bank of England," Sinche said. "What could be interesting is if you see steady as she

goes out of the ECB but actually have more talk of policy snugging out of the Bank of England, talk about raising rates and the things they need to do because the economy performs pretty

well." If the Bank of England is more hawkish, he said that could spill into the market's thinking about the Fed pulling away from its easy policies. The Fed has said it would end

the tapering of its bond buying program in October, and economists expect it to begin raising rates in the middle or at least by third quarter of next year. The ECB is expected to announce

further easing efforts later in the year. "If it wasn't August, you might want to look at the ECB meeting, but it's August so I don't think you need to look at the ECB

meeting. The inflation numbers there set a new low for the cycle and that probably leads them to think of something new to do for the fourth quarter," Sinche said.Like other currency

strategists, Sinche expects the dollar to strengthen in the second half and finish the year with slight gains against the euro. "We think there's some signs we're getting a

little bit of abreakout," he said. The dollar index was up about 0.3 percent for the week, as of late Friday. 'NORMAL VOLATILITY' Suzuki said it would be normal for stocks to

continue the selloff and see a 5 percent correction. "That's normal volatility. Investors should be comfortable with that. Over the next months, there's the possibility

something could go wrong, whether it's geopolitical or a miscommunication by the Fed. But at this point, we don't see it but that could change," he said."Five percent

pullbacks are quite common. They happen three times a year, but outside of recessionary periods, it's closer to two times. We think investors should take advantage to buy those

dips." Volatility also picked up in the past week with CBOE's volatility index, the VIX, jumping 34 percent for the week. Analysts have been expecting heightened volatility as the

Fed gets closer to raising rates, as the markets adjust. The market has not had a 10 percent or greater correction in two years. "If the market sells off 10 percent or more, history

would tell you—unless we're going into a recession, it's almost always a great buying opportunity. iI's very difficult to get that double digit correction in the market

without some fundamental shock which we don't see at this point," Suzuki said. Read More July jobs growth strong but not too strong Bank of America Merrill Lynch released its

monthly sell side indicator Friday, a monthly reading of the views of Wall Street firms on asset allocation. It has shown an increasingly bearish view of stocks over the past few months.

Suzuki said that indicator is a helpful contrarian tool. He said itshows that there is not complacency about the market. The average recommendation of the biggest firms is that investors

hold 50.8 percent oftheir portfolio in stocks, down from 51.4 percent in June and below the long-term average of 60 percent. "If you look at our sentiment gauge it tells you

there's an incredible amount of skepticism in this rally. If you look at fund positioning, mutual fund positioning is the most defensive it's been in five years," he said.

Suzuki added that could also be a bullish sign. "I don't think that there's any big fundamental reason for the selloff we've been seeing. Anecdotally, it seems to be

driven more by ETF and hedge fund selling, more than the wholesale panic selling or forced selling by investors," he said. WHAT TO WATCH Monday Earnings: Marathon Oil, AIG, Vornado

Realty, Tenet Healthcare, Cardinal Health, Reaology, Pioneer Natural Resources, HSBC 2:00 p.m. Senior loan officer survey Tuesday Earnings: Disney, CVS Caremark, Archer Daniels Midland, MGM

Mirage, Michael Kors, Cablevision, Scotts Miracle-Gro, Time Inc., Frontier Communications, Groupon, Potbelly, Take Two Interactive, FireEye, First Solar, Zillow, Liberty Interactive, Liberty

Media, Regeneron, Activision Blizzard, Toyota 10:00 a.m. ISM nonmanufacturing 10:00 a.m. Factory orders Wednesday Earnings: Time Warner, Mondelez International, Chesapeake Energy, Devon

Energy, Viacom, AOL, Molson Coors Brewing, Devon Energy, DishNetworks, Ralph Lauren, Transocean, 21st Century Fox, Keurig GreenMountain, CenturyLink, Jack in the Box, Zulily, ING 8:30 am

International trade Thursday Earnings: Wendy's, Orbitz, CBS, Monster Beverage, News Corp, Nvidia, Mylan Labs, AMC Networks, Zynga, Lionsgate, Sprouts Farmers Market, Windstream,Duke

Energy, Sempra Energy, Stratasys, Teradata, Computer Sciences, GreatPlains Energy Weekly chain store sales 8:30 a.m. Initial claims 8:30 a.m. Consumer credit Friday Earnings: Brookfield

Asset Management, Buckeye Partners,Petrobras 8:30 am Productivity and costs 10:00 a.m. Wholesale trade _—By CNBC's Patti Domm_