Wild volatility has become such a norm in the stock market that it's impossible to imagine anything but another rocking week ahead.
The Dow this past week lost 4.4 percent, its worst weekly loss in nearly five years. That wiped out the entire 4.39 percent gain made the week earlier, when it had its best week in nearly five years. Meanwhile, the CRB (a key commodities index) made an all time high as wheat and other commodities rose, and the dollar had its best week in eight months. Oil gained more than 4 percent Friday, finishing the week at $91.77.
Wall Street is battling a pervasive fear of more credit troubles, and the idea the economy could be in or headed for recession is rattling stocks. So traders are watching the G-7 meeting in Tokyo over the weekend for any commentary that could impact the dollar. There is also a fairly substantive economic calendar in the week ahead, and Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson speak before the Senate Banking Committee Thursday. There are a few big earnings reports, like GM , Coca-Cola and some of Europe's biggest banks.
If it feels like the rotation of funds in and out of stock sectors is more rapid fire than usual, that's because it is. Or, at least it hasn't been this volatile for sector rotation for five years.
Goldman Sachs U.S. investment strategist David Kostin explains that part of the reason may be the fact that there is a wide divergence in opinion among stock investors about the economy. There are those who believe a recession started late last years, and others that don't see one coming until early next year, and those investors are playing their views in the stock market.
Goldman Sachs' economists believe that the U.S. is headed for a recession now, and that the first and second quarters of the year will be negative. But then they expect the economy will start to grow again in the second half of the year.
Kostin speaks with dozens of buyside managers and says a view he hears from many hedge fund managers, in particular, is that they believe a recession could have started in the fourth quarter, will continue in the first quarter and then the economy will begin to grow again.
He showed us a chart that shows a spike in the volatility of sectors, based on high and low returns, and there is a big run up in January to a level not seen since January, 2003. That would explain why some days we see a big rise in the utilities while the financials are caving, and vice versa.