Brace for more volatility in the week ahead as investors wrestle with dual concerns that stocks have gotten too pricey and that the economic recovery is just too uncertain.
Stocks start November on wobbly footing, after the past week's selling helped erase October's gains and pushed the S&P 500 to its first monthly loss since March.
The Dow fell 2.6 percent for the week, finishing at 9712 but it was a half percent higher in October. The S&P 500, at 1036, was down nearly 2 percent for the week and 4 percent for the month, ending a run of 7 monthly gains.
Fresh manufacturing data Monday and the key October jobs report Friday are critical pieces of data for markets puzzling over the shape of the economic recovery. The dollar will continue to play a central role.
The Fed's meeting mid week has taken on even more importance because of speculation members may want to signal they are looking ahead to higher interest rates. Many Fed watchers, however, do not believe the Fed will take any action or change language in its statement about interest rates until early next year.
"I think the first hurdle is the Fed. Once we get through the Fed, that will be the catalyst that probably calms markets down," said Adam Boyton, currency strategist at Deutsche Bank.
Boyton said he does not believe market speculation that the Fed will drop the language in its statement that says it will keep rates low for an "extended period." That should put pressure back on the dollar.
A weaker dollar has meant rising risk assets, such as stocks and commodities. In the past week, the dollar gained against the euro and other currencies. At the same time, stocks struggled and most commodities fell. The stock market, however, had one very good day Thursday, with the Dow adding nearly 200 points on a slightly better than expected third quarter GDP reading of 3.5 percent.
"What's not really healthy is the big blow up Thursday and then this negative day back to back. That's not healthy for the market," said one trader as the Dow plunged nearly 250 points Friday. As stocks moved lower, the Chicago Board of Options Exchange's VIX, or volatility index, shot higher, signaling increased fear in the market Friday.
"The reason the VIX popped so much is because of the out of the money put buying in the S and P 500," said Patrick Kernan of Cardinal Capital. "A level over 30 means people are panicked about this market being choppy over the next couple of weeks." The VIX rose 24 percent Friday to 30.69.
"The price to cover downside risk, meaning a break in the market, has gone up incredibly," he said. Kernan said the VIX is now implying a daily move of as much as 19 points in either direction.
Technical strategist Scott Redler, of T3Live.com, said he thinks the S&P 500 could test the 1020 level next week, and that trading will be choppy. "If things start to intensify, there's very good support at 980," he said.
Citigroup's chief U.S. equities strategist Tobias Levkovich said he thinks the market may have seen its highs for the year. "We were telling investors that we thought the market would end at around 1000 for the year, and we could see an overshoot to 1100, which we have seen," he said.
Levkovich said if the market moves higher into year end, as some others believe, then the beginning of 2010 will be more challenged. "I'm not convinced we're going to have a great run at year end. Investors are really struggling with where we go from here," he said.
He now expects to see the stock market move higher in the beginning of 2010, possibly to 1200 on the S&P, before backtracking in the second half of the year.
"As you get to mid year, you're going to start to think about the Fed's exit strategy. You're going to worry about the stimulus not providing expansionary money into the economy and you're going to worry about the Bush tax cuts expiring," he said.
Levkovich said some of the things he saw as positives for stocks are fading. He said investor sentiment has improved and that is a contrarian signal. "I spoke to investors in the last couple of weeks and there is really noticeable anecdotal bullishness," said Levkovich. He also said stocks are now at fair value and there is less chance of momentum from earnings revisions going forward.
Economic Reports and Earnings
There are still a good number of earnings reports due in the coming week, but the economy is taking center stage once more. The third quarter GDP number was viewed as a good sign by some economists, but its sustainability was a source of debate among traders as stocks floundered Friday.
Arguably, the economy's performance in the fourth quarter and first quarter will determine the shape of the continuing recovery—be it U, V , W or something else. It is particularly debatable because some economists see growth decreasing in the fourth quarter, while others see it rising. This week's economic reports will provide the first good look at what could be expected for the fourth quarter. Another factor will be the consumer's willingness to spend on holiday shopping.
RBS chief economist Stephen Stanley sees fourth quarter growth at the same level as the 3.5 percent in third quarter. He said the major data to watch this week will be ISM manufacturing data on Monday, and the jobs report Friday. In September, both of the those data points were weaker than they were in August, and it is important to see them improve over August's numbers.
He expects job losses of 135,000, below the consensus of about 170,000. Non-farm payroll losses in August were at 201,000. "People are looking for improvement," he said. "The question really is what happens, how quickly will we get better. The real disagreement is what happens when we get to zero. Until we start to see positive payroll prints, I don't think people will be convinced."
Stanley said auto sales will also be important, when they are reported by auto makers Tuesday. "The noise we're hearing out of the auto makers in October is that things are better. There's some real improvement going on there. I don't think we should fool ourselves into thinking things are good because clearly they're not, but they're not the lows that we saw earlier in the year," he said.
Other data includes pending home sales and construction spending Monday; factory orders Tuesday; ADP employment and non-manufacturing ISM Wednesday; weekly jobless claims and productivity and costs Thursday, and wholesale trade and consumer credit Friday.
The Fed's meeting starts Tuesday and winds down Wednesday with a 2:15 p.m. statement. The European Central Bank and Bank of England also hold rate meetings Thursday.
Some major companies are reporting in the week ahead, including several global auto makers, food giant Kraft and Cisco .
On Monday, Ford, Clorox, Humana, Loews, CNA, Sysco and Dean Foods report in the morning. Anadarko, Chesapeake Energy and Vulcan Materials report after the bell that day.
Tuesday's reports include Archer-Daniels, Emerson Electric, Cognizant, AmerisourceBergen, Rockwell Collins, Rowan Cos, MasterCard, Marvel Entertainment, Medco, Polo Ralph Lauren, Tenet Healthcare, Viacom and Vornado. Kraft, Pitney Bowes and Hartford Financial report after Tuesday's close.
Time Warner, Total, Automatic Data, Baker Hughes, Becton Dickinson, Comcast, Devin Energy, El Paso, Foster Wheeler, Marsh McLennan, Molson Coors, Nissan and Transocean release earnings Wednesday morning. Cisco, Allstate, Murphy Oil, News Corp and Whole Foods report after the bell that day.
On Thursday, Toyota, Cigna, CVS Caremark, MGM Mirage, Sara Lee, Thomson Reuters, Unilever, Dynegy, Dr. Pepper Snapple, Teradata, Kimco Realty and Nasdaq OMX report ahead of the bell. After the bell reports are expected from Starbucks, Public Storage, NVIDIA, CBS, International Game Technology, Activision Blizzard, Crocs and Vera Sign. Fortress, Mirant, Edison International and Smith and Nephew release numbers Friday.
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