Bracing for the U.S. Debt Downgrade Reaction

With the storm cloud of the S&P debt downgrade overhead, the threat of another possible ratings cut on the horizon, and the market's technical backdrop now in question, we advise maintaining long exposure to gold and bonds to hedge your long equity exposure. We remain bearish on big-cap banks and big-cap research stocks. We for all that have exposure to consumer-discretionary names, nevertheless would not add to this group until price action begins to improve, which could put renewed pressure on the shorts.

Report on second-quarter productivity

Tuesday's docket features a report on second-quarter productivity and labor costs from the Bureau of Labor Statistics. But, traders will likely be holding their collective breath ahead of the latest monetary policy decision from the Federal Open Market Committee, which is due out in the afternoon. Quarterly revenues results are expected from Walt Disney, AOL, Demand Media, Fuel Systems Solutions, Harbin Electric, ReneSola, SunPower, Beazer Homes, Cree, Dish Network, and EchoStar.

The economic calendar concludes on Friday with the release of retail sales for July, June's business inventories, and the preliminary Reuters/University of Michigan consumer sentiment index for August. In the meantime, J.C. Penney, Century Casinos, Mentor Graphics, and Tree.com will share the revenues spotlight.