Market Outlook: Stocks Could Struggle Amid 'Buyer's Fatigue'
Stocks could struggle in the week ahead as the market's 7-month rally shows signs of tiring.
There is another barrage of third quarter earnings reports, including names like ExxonMobil,Procter and Gamble,Aetna and Verizon.
But investor focus should shift to economic news with the first look Thursday at third quarter GDP. The number is significant in that it should mark the end of the recession with the first quarter of growth since second quarter, 2008.
Economists expect a number of 3 percent or better, after the second quarter's decline of 0.7 percent.
The Dow in the past week had its good days and bad, ending barely changed at 9972, down 0.2 percent. The S&P 500 gave up 0.7 percent to finish at 1079, and the Nasdaq lost 0.1 percent to end at 2154.
Friday's market though was choppy, with the Dow losing 109 points, and traders said the week ahead could start on a sour note.
"I'd say it's buyers' fatigue that's set in," said John O'Donoghue of Cowen. "The stock market seemed to be going up on bad news for a certain period, and now we have what's perceived as good news, which is fine for some of the earnings reports, but now all of a sudden it seems the market's got it fully priced in."
Earnings for the most part have surprised on the upside, but O'Donoghue said it's clear investors have become more concerned about the lack of revenue growth.
Another source of tension in the markets will continue to be the weakening dollar, which has moved lower as risk assets, like stocks and commodities have moved higher.
There is a growing chorus of concern that the shrinking green back is inflationary, making everything from oil to wheat more expensive, and diverting investors from U.S. assets longer term.
Investment strategist Richard Bernstein said he views the weak dollar as a risk.
"The way I view the weak dollar is not so much as the world is coming to an end..but I will say I'm very concerned by what a weak dollar does. It hampers or dampens the effect of monetary and fiscal policy," said Bernstein, CEO of Richard Bernstein Capital Management.
Yet, some economists, like Deutsche Bank's chief U.S. economist Joseph LaVorgna say it is not a problem for now because it helps the balance of trade and boosts American companies' foreign profits.
"You have an orderly decline in the dollar, and I expect that to continue and don't look at it as a negative," said LaVorgna.
LaVorgna said the September durable goods report, due on Wednesday is a key headline for the week because it will give more information on demand in the current quarter, but the GDP number is likely to get more attention.
He said third quarter growth could be as high as 4 percent.
"If that growth is weaker than expected because of inventory liquidation that keeps the powder dry for even bigger gains in Q4. What matters more is the mix. A lower headline number because of lower inventory liquidation is more bullish for growth than a high headline number from inventory building," LaVorgna said.
LaVorgna said in a note Friday that if the durable goods inventories are weaker than expected, he would trim his third quarter GDP estimate and add more growth to the fourth quarter.
He expects September durable goods orders to show an increase of 1.5 percent.
Jefferies managing director Art Hogan said GDP is the big number for stocks in the coming week.
"GDP is going to be a surprise. If you track the estimates, they continue to inch higher and the reaction will be 'Yea, it's going down after that.' But the delta between the first quarter and third quarter is going to be eye poppingly big," he said.
"There's going to be a 9 percent swing between the third quarter and first quarter GDP number. That's slightly above consensus but that's going to wake people up," he added.
Another focus for markets is the record week of Treasury issuance in the week ahead, starting with Monday's 3- and 6-month bills and 5-year TIPS auctions.
The Treasury auctions $44 billion in 2-year notes Tuesday; $41 billion in 5-years Wednesday, and $31 billion in 7-years Thursday. Bonds were under pressure in the past week.
The yield on the 10-year rose to 3.475 and the 2-year climbed to 1.000 percent, its highest yield since Sept. 29.
Traders were cautious about Monday's market as Friday trading came to a close.
"The big earnings catalyst is taken out of it," said one trader, noting the market no longer moved higher on good earnings news Friday.
Hogan also said the market could see some selling pressure in the coming week.
"On balance, I think you're going to wake up Saturday morning and see everyone turned negative all of a sudden. I think that becomes its own worst enemy. I think people will come back in and buy the dips. Everyone is looking for a 10 to 15 percent pull back, but I'd be surprised if we get 5 percent," he said Friday afternoon.
Bernstein said the market is behaving as it typically would at this point in the cycle.
There was a sharp increase and now it is getting ready to advance more slowly.
"Early in the cycle you get a multiple expansion type of market...this has happened more quickly than people expected," he said.
"The next phase is you get an earnings driven market, and earnings driven market has a much slower advance. We're not quite there yet, but we're on the cusp," he said.
"The indicators that one would look at are actually getting healthier. That argues that earnings growth in 2010 may be much stronger than people think," he said.
Bernstein said he still thinks lower quality stocks will lead, contrary to what some strategists believe. He said history shows that they lead in every turn in the cycle.
In 1991, for instance, low quality stocks were up 91 percent in a year. This year, they are up 120 percent so far.
Bernstein said he still likes lower quality stocks and would balance them with Treasurys in a portfolio.
Wet weather in the farm belt has delayed the harvest and pushed prices for corn, wheat and soy beans to 4-month highs.
The move in grains came, as oil climbed above $80 per barrel and the dollar continued to sink.
On Friday, soy beans continued to rise, even as stocks and other commodities slid.
"It's an issue for sure. It's preventing people from retrieving record-sized crops that are out there," said Gavin Maquire, director of research at E Hedger. "It's an interesting scenario. The supplies are plentiful. They're well above early season estimates but because we can't get our hands on them, everyone who needs fresh corn and soy beans is paying through the nose for them."