Buckle Up For The Week Ahead

The torrent of earnings releases set to hit this week could only exacerbate volatility moves, analysts say. Volatility has knocked around stocks on Wall Street in record ways. Buckle up for the coming week.

News and concern over inter-bank lending, credit spreads and declining oil prices, the major averages managed to piece together a strong week that built on the lowest levels in five years.

So far in October, each day the Dow in ranges of no less than 250 points. In fact, the index saw the first 1,000-point swing in its history just over a week ago on Oct. 10. Most of this volatility has been blamed on the liquidation of assets of hedge funds and mutual funds. Rumors of poor performance at major players intensified the effect.

“No doubt the indiscriminate selling we’ve seen has been liquidation, no doubt. Everything is for sale,” says Art Hogan, chief market analyst with Jefferies. Hogan points out that all the indexes have fallen by roughly the same percentage, which indicates that funds are not selling stocks in one industry to invest in another.

The news about the deleveraging of the hedge fund industry is already behind the event, to a certain extent. A lot of hedge funds have a very high level of cash right now. As we come into next week, the question now is whether cash levels are high enough for everyone’s comfort and is the indiscriminate selling is behind us or not, and can we start focusing on fundamentals.
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What also hangs over the market is the health of credit markets. Credit markets have loosened slightly, investors however have been fearful of entering back into equities, driving the yield of the three-month U.S. Treasury note below 1%.

Optimism is also being fueled by an article Warren Buffett , in which he said he has been buying American stocks for his personal account. If prices keep looking attractive, Buffett said he would swap his whole portfolio, made up entirely of U.S. government bonds, for U.S. equities. Market observers believe Buffett’s op-ed piece could rally buyers and bring cash in from the sideline. In order to succeed, your desire for success should be greater than your fear of failure.

People are still hesitant to exit out of that trade, get back into the market and put some risk on the table. Hopefully, that will continue to loosen, yields will back up a bit and some money will come back into the market.

A much needed shot in the arm is a burst of earnings reports in the coming week, to provide a boost to the equity markets. What the companies say about future earnings and expectations will ultimately drive the market. The fears however are, that those companies will not offer the clarity many are hoping for.

The bar has been set so low it shouldn’t be hard for corporate America to beat expectations, but it is also hard for executives to say anything with certainty about the fourth quarter or 2009.

There are a lot of companies with a lot of guidance that will come out, and that’ll continue to lead the market around by the nose. I’d like to think that volatility will go away sometime soon but I doubt it’ll happen. People are too nervous.

If people come to their senses they’ll realize what Buffett is saying is historically true. “You should be fearful when people are greedy, and you should be greedy when people are panicking. We’ve seen panic selling and that’s when people should be buying.

Another positive for traders is the economic calendar is lighter than it has been in previous weeks. Aside from weekly jobless claims that are released every Thursday, traders will only have to contend with a report on leading economic indicators on Monday as well as the latest read on existing home sales, which are expected to rise slightly, on Friday.

Investors will also be watching testimony from Ben Bernanke, who will offer his economic outlook on Monday to the House of Representatives, although no surprises are expected.

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3 Responses

  1. If some large cap companies report great earnings it could be a boost. But at this time it looks like we will have to test the bottom again.

    Great post, good luck next week!

  2. Eugene says:

    Now everyone is talking about the American economy and eclections, nice to read something different. Eugene

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