Time short for S&P to end 2011 higher

The U.S. flag hangs outside the New York Stock Exchange November 9, 2011.

NEW YORK (Reuters) - With two weeks left in the trading year, the euro zone debt crisis will remain the primary impediment to pushing the S&P 500 index into positive territory for 2011.

Uncertainty over progress in the region, along with the potential for credit rating downgrades on euro zone countries, have kept investors on edge and market volatility high.

Even with a fairly busy U.S. economic calendar, which includes a batch of data on the housing market, the final reading on gross domestic product and durable goods orders, markets will focus on developments from Europe.

"What everybody is going to look at is the same thing they've been looking at -- every time a German official opens their mouth we get crushed," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"I'm keeping my fingers crossed that Santa Claus is out there. But we've got to see something."

The benchmark S&P 500 index .SPX.INX is down about 3 percent for the year and would need to climb above 1,257.64 in order to end higher for the year.

A rally by stocks on Friday fizzled, and the market ended with only modest gains after the latest credit warning about possible downgrades of European nations. For the week, the Dow fell 2.7 percent, the S&P lost 2.9 percent and the Nasdaq was down 3.5 percent.

Italy's prime minister urged European policymakers on Friday to beware of dividing the continent in the effort to contain the debt crisis, warning against a "short-term hunger for rigor" in some countries, in a swipe at Germany.

Stocks have been whipsawed as investors weigh the threat from the euro zone crisis against modest improvement in U.S. economic data and stocks that many regard as cheap.

"There do appear to be some improving economic indicators domestically, but it's hard to see how they win the day if Europe continues to be a big concern. It's not like the valuations are at such bargain-basement prices that it becomes a one-way bet," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

As volumes begin to dry up and market moves become more exaggerated during the holiday period, the volatility may help lift the stock market into the plus column.

CHANCE OF RALLY

"Can you see an upside rally? Certainly, because you are going to have some asset managers in the end who are going to try and just push it so the market ends at the very least flat on the year, if not higher," said Ken Polcari, managing director at ICAP Equities in New York.

"If there is going to be a rally at all, it will happen on light volume because there will be fewer and fewer participants. When there is less volume, you do have the ability to have those exaggerated moves, but people will take advantage of that."

Volatility in individual shares could also be affected by corporate earnings preannouncements. There have been 97 negative earnings preannouncements issued by S&P 500 corporations for the fourth quarter, compared to 26 positive preannouncements, resulting in a negative-to-positive ratio of 3.7. That's the highest in 10 years, according to Thomson Reuters data.

Companies that have provided outlooks in recent weeks include DuPont (DD.N), Intel Corp (INTC.O), United Technologies Corp (UTX.N) and Texas Instruments Inc TXN.N.

Unexpected management shakeups could also be on the horizon and increase the tumult in stocks. Both Cablevision Systems Corp (CVC.N) and the New York Times Co (NYT.N) saw high-level executives suddenly leave their posts.

But stock movements next week will ultimately be dictated by actions taken in Europe, with the light volume exacerbating market swings.

"The only thing that is going to be of any interest is certainly the continuing headlines on Europe, whether or not they come any closer to what looks like a potential agreement," said Polcari.

"You may get a little bit of a push to the 1,250 to 1,270 range, but much beyond that I don't see why it would go any higher unless you get some explosive announcement out of Europe."

(Reporting By Chuck Mikolajczak; Editing by Kenneth Barry)