These Days, Even Minor News Can 'Buffett' Stocks

The markets had a Warren Buffett rally on Tuesday, but tomorrow's news could just as easily send stocks plummeting again.

After slogging through generally disappointing fourth-quarter earnings, Wall Street is looking for direction. Analysts believe that for the next several weeks, the markets will be ruled by emotion. That means any event, no matter how minor, could spark a huge reaction by stocks.

David Karp / AP

"You’ve got a lot of headline news," said Nadav Baum, managing director of investments at Pittsburgh-based BPU Investment Management. "Credit-card defaults, the subprime thing and the financials are going to continue -– any squeak is going to be major headlines."

Even on Tuesday, Warren Buffett's offer to back $800 million of muni bonds from troubled insurers sparked a big rally. But the gains faded by the close as investors realized that the proposal won't do much to help ease the credit crisis.

And with all the ups and downs, market pros think stocks will probably end about about where they are now.

"The market is just going to go sideways here," Baum says.

With that in mind, here are some of the things that are likely to move the markets this week.

Retail sales numbers for January will be out at 8:30 am New York time Wednesday. With everybody worried about a possible recession, the report will be closely watched by investors.

Federal Reserve Chairman Ben Bernanke will address Congress on Thursday in his semiannual testimony on the state of the economy. His remarks are expected to reflect a less optimistic view than the central bank had in November in its previous forecast.

"This is again going to be a chance for the Fed to clarify what they see and what they're going to do," said Todd Colvin, vice president at MF Global.

Market-watchers will be looking for clues as to whether the Fed will again in March drop key lending rates, moves that recently have provided brief market bounces but little lasting effects. Interest rate cuts generally have six-month lags, but drive the emotions of investors over whether the Fed will be aggressive in trying to stave off a recession.

Wall Street has suffered under a deluge of bad news from the financial sector, and investors will be watching for anything else to come out that could influence stock performance. Tuesday brought a rare spot of encouraging news, after

"Any other news that points to an economy going into a recession or not going into a recession, those things are going to be important, as will anything else in the financial sector," said Quincy Krosby, chief investment strategist at The Hartford. "The market understands that we're going to continue to see writedowns, but now the market is looking over to Europe for the writedowns coming in there."

The market also follows politics, and Krosby noted that stocks gained following last week's withdrawal of Republican presidential candidate Mitt Romney -- not because Wall Street had anything in particular against the former Massachusetts governor, but because it appreciated the stability the move brought to the GOP primary. Arizona Sen. John McCain is now considered by most analysts to be the presumptive Republican nominee.

Investors also have been fickle on several other news developments -- stocks slipped Monday after questions were raised over bond insurer AIG's valuation of risky debts but later recovered, while the market also vacillated through premarket trade Tuesday over questions regarding General Motors earnings.

Look For Safety

So how to play a market driven so much by its own quirky prerogatives?

Greg McCoach, financial analyst at Mining Speculator, is advising safe moves in cash, such as the Canadian dollar and to a lesser extent euros, and to keep watch on possible declines in precious metals.

"I think the liquidity issues are really going to cause some havoc in our markets," he said. "Hold some cash, look for some deals, and be patient. Let the deals come to you."

Baum, though, is pointing his clients towards financial stalwarts including Bank of America and JP Morgan ; real estate investment trusts (REITs); and pharmaceuticals Bristol-Myers and GlaxoSmithKline .

"It's the old story: You've got to look at sectors that are high quality and sectors that have gotten beaten up the most," he said.

As for when this tricky market may pass and things get back to normal, look for one word: Volume.

"Sometimes when a market comes out of a bear market you don't know it. You only know it in retrospect," Krosby said. "But the thing you're looking for is the day that the market goes up and has volume. Volume is conviction, and that is the oxygen of the bulls."

Until then, though, emotion is likely to rule the days ahead.

"At the end of the day, there's an awful lot of money on the sidelines," Krosby said. "That money is going to go to work. The question is, when? When do they start believing in a sustainable rally?"

© 2009 CNBC.com