Wall Street limps to the end of what appears to be a positive quarter this week amid doubts on whether the economy can rebound and the market can keep upward momentum in the second half of the year.
With the year's midpoint coming up, a key for stocks in the holiday-shortened week will be Thursday's report on US unemployment and payrolls, which comes a day early with markets closed for Friday's Independence Day celebration.
The report is seen as one of the best indicators of economic momentum, and could provide clues about the timing and strength of a rebound from the worst recession in decades.
The blue-chip Dow Jones Industrial Average dropped 1.2 percent to 8,438.39 in the week to Friday, a second weekly drop after a four-week winning streak.
The technology-heavy Nasdaq rose 0.59 percent on the week to 1,838.22 while the broad-market Standard & Poor's 500 index declined 0.25 percent to 918.90.
Many say that despite the lackluster week, the market is sensing that the US and global economies will soon come out of their deep slump, yet some of that has already been reflected in the 40 percent jump in the broad indexes since March.
Mark Luschini, chief investment strategist at Janney Montgomery Scott, said there is some trepidation about how far the rally can run, with the S&P index still up some 35 percent from its March lows.
"The dilemma amongst market participants at the moment relates to whether the weakness was merely the stock market taking a well-deserved breather or did it warn of something more sinister," he said.
"On one hand, the rally germinated from improving news on the economic front and confidence returning to the financial markets ... On the other hand, the 'green shoots' metaphor is a tad worn at this juncture and the market's budding skepticism is based on the need to realize actual good news rather than advancing on news that is just comparatively less bad."
The Federal Reserve calmed some nerves over the past week as it made no change in its near-zero interest rate policy and signaled it would keep its stimulus efforts on track without pulling back or expanding the effort.
The announced extension of key lending programs put into place to counter the credit crisis appeared to generate confidence.
"By extending its lending facilities into next year, the Federal Reserve sent a strong message to financial markets Thursday that interest rates will remain unchanged for the foreseeable future," said Ryan Sweet at Moody's Economy.com.
Nariman Behravesh, chief economist at IHS Global Insight, said there is growing evidence the worldwide slump is ending.
"The light at the end of the tunnel is shining a little brighter," he said.
"The world economy will begin its recovery in the second half of 2009 as the global inventory correction winds down. The timing and speed of regional recoveries will vary, with Asia leading, the United States coincident, and much of Europe lagging behind."
But analysts say Thursday's payrolls report could be a key for the economy and the stock market.
In May, the jobless rate surged to 9.4 percent in May, while the number of job losses slowed to a better-than-expected 345,000. Some analysts said the report was a positive sign that suggested more people are looking for work.
The market is expecting another loss of 370,000 jobs and an unemployment rate of 9.6 percent but some see a possibility of an upside surprise.
"Although we are forecasting that payrolls declined 225,000 in June, we would not be shocked by a small payroll increase," said Brian Wesbury at First Trust Portfolios.
Patrick O'Hare at Briefing.com said the market may have gotten too far ahead of the economy, and that earnings need to pick up strongly to justify stock gains.
"The stock market has rebounded the past three months on reduced risk, increased liquidity, and signs of improvement in the economic trends," he said.
"Unfortunately, the earnings outlook has not improved nearly to the same degree. This suggests the market rally should be viewed with skepticism."
Bonds rose as inflation fears ebbed.
The yield on the 10-year Treasury bond dropped to 3.506 percent from 3.789 percent a week earlier and that on the 30-year bond declined to 4.303 percent from 4.522 percent. Bond yields and prices move in opposite directions.
The coming week also features data on monthly US auto sales, consumer confidence and a purchasing managers' index on the manufacturing sector.