The vacillating U.S. stock market turned negative last week, pulling back 2.1% as investors worried anew about the sprawling debt crises on both sides of the Atlantic. But this downward lurch could have an upside.

With credit agencies threatening to slash Uncle Sam’s debt rating, and traders shunning government bonds from Ireland to Italy, investors have been selling into stock-market rallies with renewed zeal. The Standard & Poor’s 500 closed more than 1% below its intraday high in each session last week from Monday through Thursday, a buckling streak not seen since a similar nine-day spell in March 2009 that immediately preceded this bull market. Such persistent determination to sell into strength eventually exhausts the selling pressure, and in 14 such prior instances, the stock market has gone on to average gains of 4.3% a month later and 11.7% after six months, notes Bespoke Investment Group.

But any progress likely will be choppy. The drama queens in Congress debating our debt ceiling will milk the limelight for all it’s worth, and won’t reach any deal before the 11th hour. But they know full well the consequences of even a momentary default on our ability to borrow at hospitable rates.

It also helps that market sentiment is noncommittal, even pessimistic. A crowd bracing for—all together, now—”a soft patch” lowers short-term expectations for the second-quarter results that companies are starting to report, even if they could prove bearish in the longer run when the consensus starts to demand evidence of a reaccelerating economy. Analysts also have been revising estimates lower for 11 straight weeks, creating what Paul Hickey of Bespoke calls “a crisis of confidence among analysts.” Meanwhile, the Chinese economy grew by a stronger-than-expected 9.5% in the latest quarter, although runaway pork prices pushed core inflation in June 6.5% higher than a year ago. The Shanghai Composite Index has rebounded for four straight weeks.

Will second-quarter profits give the U.S. market a lift? Wall Street expects Standard & Poor’ 500 companies’ earnings to grow 11.8% from a year ago. In the past three quarters, companies have surpassed estimates by a median 4%, so anything less than 3% could spell trouble, notes Lance Stonecypher, Ned Davis Research’s senior sector strategist. But he is siding with the bulls in the short term, even as longer-term concerns have him watching for signs of a bull-market peak.
So far, companies’ earnings reports have been mixed. Alcoa’s (ticker: AA) second-quarter profit more than doubled, but merely met analysts’ lowered forecasts. Yet Google (GOOG), flagged here positively three weeks ago when shares were near 475, pushed above 600 as revenue rose 36% and net income surged 37%. It closed the week at 597.62.

The Dow Jones Industrial Average snapped a two-week gain and finished last week down 1.4% to 12,480. The Nasdaq Composite Index ended its three-week winning run and dropped 2.5% to 2790, while the Russell 2000 fell 2.8% to 829 (Source: Barrons Online).