Market Preview: A Rough Road

NEW YORK (TheStreet) -- The Federal Reserve said Wednesday it expects the economy to get worse, and lo and behold, the majority of the data that arrived on Thursday illustrated that point.

The call by Goldman Sachs to short the S&P 500 was certainly a factor in the deep sell-off, as was the uncertainty ahead of the actual Moody's bank downgrades that arrived after the bell, but it was the ugly data seemed to carry the most weight with sellers.

The trap that Wall Street is in when it comes to equities right now is fairly ingenious. Investors showed in the first half of June that they stand ready to go risk-on if the Fed comes across with QE3. But the Fed has made it clear that it fully intends to sit on its hands unless the economy gets a whole lot worse. That sets up a real "be careful what you wish for" scenario.

Sam Stovall, chief equity strategist at S&P Capital IQ, is bullish but sees a rough road ahead over the next six months.

"With the extension of Operation Twist, Dr. Bernanke indicated that the patient does not need another defibrillator jolt, but it does need to be hooked up to the IV a bit longer," he wrote in commentary late Wednesday. "Even though inflation is tolerable, the risk of an imminent breakup in the euro is now less likely, and that the Fed renewed its low-rate pledge through 2014, we still believe the global equity markets will trace out a very choppy advance during the second half."

The next Fed meeting is scheduled for July31-August 1 so traders are weeks away from being able to put a positive spin on bad economic data by bringing the prospect of QE3 back into the mix. That means bad data is just going to taken for what it is: More evidence that this slow recovery is starting to stall.

As for Friday's scheduled news, Carnival(CCL) is slated to report its quarterly results before the opening bell. The average estimate of analysts polled by Thomson Reuters is for a profit of 8 cents a share in the company's fiscal second quarter ended in May on revenue of $3.55 billion.

Shares of the cruise line operator are up more than 7% so far in 2012, and UBS is bullish about the stock ahead of the numbers. The firm lifted its price target on the stock to $39 from $34 earlier this week and kept its buy rating intact. It thinks the company could lift its guidance for fiscal 2012 to reflect an expected benefit from lower fuel prices.