Market Intelligence: Volatility and 90% Down Days

With the Dow up 92 points on Monday and down 226 yesterday, there's little doubt that stock market volatility is back.

What's driving the market swings: earnings, worries about the housing slump and interest rates.

"We're certainly in for a volatile day," says CNBC “Squawk Box” guest Peter Yastrow, MF Global market strategist from the floor of the Chicago Mercantile Exchange. "I think that the unknown right now is driving everybody's  imagination a little bit and we have banks involved and credit analysts are notoriously slow to work through a problem and I think that's why you're going to see banks lag here." 

Financial stocks led the way lower Tuesday among major S&P 500 stock group and have been down for the last 5 sessions.

Yastrow says, "it's not so much that there is a problem but that there might be and people are just going to avoid those areas."

Yastrow also sees volatility signaling a direction on interest rates that may surprise some.  "We're seeing volatility getting priced in though interestingly enough in the interest rates they're not fearing a Fed tightening, they're fearing a Fed easing.  So you see volatility on some sides of the market and not on both sides."

Chicago Board Options Exchange Volatility Index , which measures market volatility through S&P 500 options, briefly surged above 19 on Tuesday before closing above 18 - its highest level since June 26th.

David Sowerby, chief market analyst at Loomis Sayles says the choppiness in the market still presents opportunities for investors.

"I think you're still light in the consumer because of the headwinds in housing.  I'm unexcited about the consumer staples stocks - the valuations are not compelling," says Sowerby who adds, "what I am excited about are the plays in capital spending and industrials - names like United Technologies and Danaher and I also have the biggest overweight in my fund in technology stocks.  It's industrials, its tech but not the consumer."

90% Down Days

From a technical standpoint, traders are also keeping an eye on selling pressure represented in trading volume. In Tuesday's market slump 90% of the volume and declining issues on the New York Stock Exchange was down. That says Larry McMillan, President of McMillan Analysis is a rarity in the market. "A short term rally usually occurs when that happens," says McMillan who adds that such extreme "90% breadth days have occurred only 3 times since 1998." McMillan says holding for 2 or 3 days after such down days has resulted in "a profit in all three cases".

Analyst Actions

Helping to ease earnings concerns is Amazon.com's blowout second quarter results and analysts are responding.

Deutsche Bank has lifted its Amazon target from $80 to $100. Soleil Securities upped its target to $91 from $79.  Think Equity raised its rating to Buy with a $105 target. One of the most bearish on the stock, JP Morgan, upgraded the stock from Underperform to Neutral. Similar Amazon bears have done the same. Lehman went from Under weight to Equal weight; Bear Stearns from Under Perform to Peer Perform.

Cowen has initiated coverage of Electronic Arts with a Neutral, citing the company's high valuation.

There's a difference of opinion on Countrywide Financial.  It has been downgraded to Underperform at Friedman Billings Ramsey with a $25 target.  Countrywide yesterday posted weaker than expected earnings and lowered its forecast. Keefe Bruyette & Woods upgraded Countrywide to "market perform" citing valuation.  It has also upped its price target from $29 to $34.

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