A market in 'disarray' awaits the next move

Investors held their breath Friday during another wild day on Wall Street, in a whipsaw week that has seen some of the biggest gains—and losses—for stocks all year.

Whether it's anticipation of interest rate movement, headwinds posed by global macroeconomic factors or the impending earnings season, there's been something for everyone, bulls and bears alike.

The market has had three consecutive days of 1.5 percent moves or more either up or down, something that has happened only 54 times since 1928, according to Bespoke Investment Group.

The week looked to be ending in uncertain fashion, with stocks searching for direction during Friday morning trading.

"Wall Street is in disarray this week as the violent gyrations are causing havoc for fund managers and active investors hoping for a smooth fourth quarter," said Todd Schoenberger, president of J. Streicher Asset Management. "The fear factor is beginning to hit panic levels as worries about a worldwide economic slowdown become real, despite round after round of stimulus and central bank intervention."

Indeed, there has been no shortage of reasons offered for the huge stock swings.

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The Federal Reserve on Wednesday kicked off a rally after minutes from the most recent Open Market Committee meeting indicated a strongly dovish bias.

However, that rally—good for 274 points on the Dow Jones industrial average, the best of the year—was sandwiched by two huge losses. Consequently, the CBOE Volatility Index, which helps measure market fear, swung to an eight-month high Thursday and is up 40 percent over the past month and 62 percent for the year.

Investors had other fears in addition to the Fed, and other reasons for hope outside of the central bank's zero interest rate monetary policy. So while the bears gained a slight upper hand for the week, the S&P 500 remains up 4.5 percent for 2014.

"It's going back to the old normal," said Quincy Krosby, chief market strategist at Prudential Annuities. "Markets have volatility and markets used to have pullbacks," she added, referring to the more than two years the S&P 500 has gone without at least a 10 percent correction.

"As we get closer to normalization by the Fed, which means the rising of rates, the market is going to demonstrate characteristics it always had, which included pullbacks and basically trying to decide what valuations should be," she added.

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Bill Gross, the noted bond fund manager at Janus Capital, warned that the intense volatility likely to come as the Fed normalizes policy will bring lower long-term returns with it.

"While monetary policy with its quantitative easing and forward guidance for low future interest rates have salvaged a semblance of growth and job gains—especially in the U.S.—they have brought prosperity forward in the financial markets," Gross said in a letter to clients Thursday.

"If yields can't go much lower, then bond market capital gains are limited. The same logic applies in other asset categories," he added. "We have had our biblical seven years of fat. We must look forward, almost by mathematical necessity, to seven figurative years of leaner: Bonds—3 percent to 4 percent at best, stocks—5 percent to 6 percent on the outside."

One classic example of how turned out Wall Street is over market behavior: After the Tuesday session that saw the Dow lose 270 points, MacNeil Curry, the respected technical strategist at Bank of America Merrill Lynch, told clients in a note that stocks had broken important support levels and more losses were on the way. The market, of course, posted its best move of the year the following day, only to give all those gains back in Thursday's session.

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Doug Kass, head of Seabreeze Partners Management who has held a bearish view of the market for much of this year, believes there is structural weakness that could last.

"With the normal caveat that the only certainty is the lack of certainty—It is my view that, at best, the market's reward-risk ratio is unattractive," Kass said in a note to clients Thursday. "At worst, a bear market might be emerging."

There's some good news, though, from a historical perspective.

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In addition to noting the rarity of three consecutive up or down days of greater than 1.5 percent, Bespoke points out that the follow-up is usually market positive.

The typical next-day gain in one of these events is 0.55 percent, while the one-week gain averages 1.13 percent. In 12 of the last 14 instances, the market has been positive, averaging gains of 2.68 percent.