High velocity market swings will be the story of the week, more so than any of the earnings or economic reports that usually catch investors' attention.
Traders will be watching for signs of life from the constrained credit markets, and many are holding out new hope that the Fed will rescue the market with a rate cut by year end.
The Dow finished Friday at 13,265, losing a stunning 4.2%, or 585 points for the week. That was its biggest weekly point loss in five years and its biggest percentage drop since March 2003. The Nasdaq lost 125 points, or 4.7%, similar to a move it made this past March. The S&P 500 wiped out 75 points, its biggest point loss since September 2001.
After Thursday's 311-point loss, stocks headed into the close Friday with relatively mild losses. But wild selling unleashed in the market's last half hour left the Dow down another 208 points.
"S&P futures closed at a discount to cash in the crazy last 15 minutes of the session, and it's been a long time since we've seen that. That means there's more rainy days ahead for stocks," said CNBC's Rick Santelli, from the Chicago futures pit.
Mad Money's Jim Cramer, who presciently warned investors last Friday to take profits, said we could see some selling early Monday, but he thinks there will be a bounce in the coming week.
"I want the market to open down badly, I want the sellers out--we can't rally until that happens. A delayed or bad opening would flush out the weak hands. We are not there yet. The selling at the end was all on light volume driven by futures in Chicago, but it worked to demoralize people. We are radically oversold and set up for a bounce AFTER A SELLOFF at the opening," Cramer wrote to us after Friday's ugly tumble.
A big flight to quality in Treasuries drove down yields dramatically in the past week, as traders reacted to a seizing up in other areas of the credit markets. The 10-year fell 3/32, ending the week with a yield of 4.787, compared to 4.95% at the end of the week earlier. The dollar gained 0.8% against the Euro and 0.04% against the yen. Oil had a volatile week as well, ending a week of swings at $77.02 per barrel, up $1.23 or 2.5%.
Wall Street Scares Itself
The talk on Wall Street will once more focus on whether the takeover business is just on hold or on life support. In the past week, the street watched the failed effort to float debt to cover Cerberus Capital's buyout of Chrysler as a litmus test. Banks had to pull the deal Wednesday and elected to erect bridge loans so the buyout can go through. Stocks initially took the news in stride (after CNBC's Steve Liesman broke the story), but that reversed Thursday when the market went into a manic sell mode.
Here's an old adage. Ok, so I made it up, but if you think back to every calamity on Wall Street in the past 20 years, you'll see it's true. One of the worst fears in the stock market is when Wall Street becomes afraid of itself.
We've seen that type of fright selling in the financials for weeks now, especially since Bear Stearns' bad news hedge funds started making headlines. Traders who handle financial stocks and loved them every day suddenly were scared by what time bombs might be buried in Wall Street's firms.
"If the Chrysler deal had not stunk up the joint, we would not have lost all that we did. We can weather mortgages but we cannot weather mortgages and corporate credits," says Cramer.
Cramer has a theory that if any of the five Wall Street banks most involved in the business of bridge financings were to spell out their worst case scenarios, the market would probably react positively, to even bad news. Right now, the market view it "as this amorphous horrible thing," he said.
"My view is if we don't get any more negative news, we'll have a snap back rally," said Cramer. He notes too that "the converse is true. On any bit of bad news, we could be down 500 points."
Santelli says for the traders he speaks with, "nothing will unseat market volatility as the prime focus" in the coming week.
"There's still lots of deterioration in corporate, mortgage and agency credits. Things we can monitor easily like 10-year swaps are at the highest levels since January, 2002," he said. In Treasuries, "you're seeing the spread between short maturities and long maturities at the widest spread in years. What you're seeing is all the yields moving lower, but the short ones are still the darlings of the flight to safety."
The work week starts early on Wall Street when futures markets begin to trade Sunday evening and Asian markets open for business.
"Sunday night's when everyone wants to tune in when they open the electronic (futures trading) platforms," said Santelli. We know Santelli likes to watch the world's markets in real time, so perhaps he means that he'll be tuning into Asian Squawk Box, available live Sunday night on CNBC.com.
There's a lot of data to pay attention to in the coming week. Tuesday's reports include personal income and the employment cost index, as well as construction spending, Chicago purchasing managers data and consumer confidence.
On Wednesday, ADP gives its early version of July jobs data, and the ISM manufacturing index comes out. Monthly auto sales are also reported that day. Pending home sales for June are released Wednesday as well.
Factory orders for June and initial jobless claims are released Thursday.
Friday is the biggie with the employment report for July. ISM non-manufacturing data is also reported that day.
CNBC's Larry Kudlow said he will watch Friday jobs data closely. "That's a big number. If profits start falling and jobs start falling, we have a big problem, but I don't see any of it. The profits for Q2 are great," he said.
Kudlow said the second quarter GDP number of 3.4% Friday was a positive. "That report buys the Fed lots of time," he said. This past week's market action has revived speculation the Fed will cut rates before year end.
In other economic news this week, Treasury Secretary Hank Paulson heads to China for meetings Tuesday and Wednesday. He will meet with President Hu Jintao and Vice Premier Wu Yi.
"Paulson will try to keep Congress happy with rhetoric about China revaluing its currency, but at the same time he is aware of the fact that if it were to reevaluate quickly it would be disastrous for the U.S. economy. for instance, prices at Wal-mart could go up 15 percent or more, according to the people I talk to," said CNBC's Erin Burnett.
Big media companies join the flood of companies reporting next week. On Monday, Verizon, Archer Daniels and Tyson report before the bell, and Sun Micro comes in after the bell. General Motors, CBS, Valero Energy, and Whole Foods report Tuesday. Kraft Food, MasterCard and Time Warner report before the bell Wednesday, and Disney, Starbucks and Electronics Arts report after the bell that day.
Viacom, NYSE Euronext, and Nokia report Thursday. Procter and Gamble reports on Friday.
So far, 304 S&P 500 stocks have reported. According to Thomson Financial, earnings growth is 7.1% from a year ago. The results have been 3.3% above estimates. Sixty-four percent of those companies have beaten analysts expectations. An estimated 99 S&P companies report next week.
On Monday, two Food and Drug Administration panels meet jointly on Glaxo's Avandia risks. CNBC's Mike Huckman will be covering the meeting in Gaithersburg, Md.
Huckman's producer said the meeting "is a huge deal because it's regarding Avandia. It gets at the larger issue of when risk is reported to the public," she said. Avandia, a diabetes medication, was found to increase the risk of heart attack in some patients.
Huckman pointed out that there is another big event before the FDA this week.
"FDA is expected to approve a new migraine drug called Trexima from GlaxoSmithKline and Pozen," he said. The drug works faster and longer than the current Glaxo blockbuster, Imitrex. In the U.S., nearly 30 million people suffer from migraines.
"We will look at the drug, the migraine market, who else has drugs in the pipeline and how this could help Glaxo. Coincidentally, the decision will come down two days after the FDA advisory committee meeting on Avandia," he said. One of the other treatments for migraines currently being tested by Allergan is the use of botox.
Also in Washington, the FCC is expected to vote Tuesday on rules governing its much awaited 700 MHz spectrum auction. A whole gaggle of companies, including Google and AT&T, have been lobbying for rules that benefit their interests. The spectrum at issue is considered ideal for delivering wireless broadband devices so it has sparked a rush by companies to urge the FCC to create rules that would allow more competition for existing cable and telephone broadband providers.