So now traders believe the next move belongs to the Fed. "You're going to hear Bernanke out there chirping," said one trader, pointing to Fed Chairman Ben Bernanke's statement Friday endorsing the bill and promising that the Fed would use all its powers to ease the credit crunch.
"We're on alert for Sunday night for one thing. We want to hear that they are going to pay interest on reserves or cut the Fed funds rate. One or the other," said Kevin Ferry of Cronus Futures Management.
Traders expect the Fed to slash the current 2 percent target Fed funds rate by a half point before its next meeting, Oct. 28.
In the past week, the Dow lost 7.3 percent to 10,325, its biggest weekly drop since July 2002. The S&P 500 slumped 9.4 percent to 1099, its lowest close in four years. The Nasdaq lost 11 percent to 1947. While stocks melted, the dollar rose 5.8 percent in its biggest weekly move ever against the battered euro.
In the coming week, there are a few key economic reports, including the Fed's minutes from its last meeting released Tuesday. Consumer credit is also reported Tuesday. Pending home sales are released at 10 a.m. Wednesday, and weekly jobless claims and wholesale trade are reported Thursday. On Friday, international trade and import prices data are released.
Over the weekend, French President Nicolas Sarkozy will host a summit on the financial crises with leaders of Germany, Britain, Italy, and the heads of the European Commission and European Central Bank. Currency traders are watching this gathering closely as the troubled European banking sector becomes an increasing source of problems for global markets and has weakened the euro.
Traders are also watching the U.S. banking sector where Wells Fargo , one of the healthiest U.S. banks, swept in with a merger offer Thursday night to beat out Citigroup's bid for Wachovia. Citigroup is protesting Wachovia's new merger deal. It's own plans to merge with Wachovia , attractive to Citi for its wealth of deposits, was brokered by the FDIC.
Bernanke speaks at the National Association of Business Economists meeting in Washington Tuesday, and Lehman Brothers CEO Richard Fuld will be on Capitol Hill answering questions on his firm's demise before the House Oversight Committee. On Tuesday, former AIG officials come before that committee.
The official start of the earnings season begins Tuesday with Alcoa , the first Dow component to report. General Electric , the parent of CNBC, reports Friday. GE has reduced expectations and also raised funds this past week through an investment from Warren Buffett and a $12 billion stock offering.
Analysts have been expecting a weak quarter, with lots of negative forecasts. "We were looking for the third quarter to be down. We were thinking down maybe 10 percent. I would say more now, given what's happened in the last part of the quarter," said Stuart Freeman, chief equity strategist at Wachovia. Freeman said the previous market winners, commodities and energy related companies should show year over year declines in earnings.
Freeman said he expects stocks to remain choppy through year end. "We were looking in the 1400 area (on the S&P 500). We're looking to adjust that to the downside. Clearly, what happened here is kind of like a geological shift," he said.
The credit crunch in the past several weeks accelerated with the ripple effect from the Lehman bankruptcy and other near failures in the financial industry. Investors have flocked to the safety of short term Treasury securities, and have shunned many other investments. Libor, the London interbank lending rate, has shot up dramatically and three-month Libor was at 4.3338 percent Friday. Plenty of corporate and consumer loans are set based on Libor.
"We do believe we're going through a recession for the rest of the year and perhaps halfway through next year. It's also the case that the market tends to look through a bottom for these kind of things," Freeman said.
"We're going to find companies are growing less aggressively," he said. Consumers will also pare back spending even more. "We did have a period where banks were helping them, but consumers did about eight years of spending in four years."
Traders have been worried that substantial losses by hedge funds that will result in redemptions that fuel even more selling of stocks. "I think we've already seen some of this," said Freeman. "I t think it's a factor we could see bring equities down further. When you're in this kind of environment, valuation isn't really what brings you to the bottom."
He said in an emotional market, hysteria can build and result in further redemptions, making stocks look even cheaper. "We're still comfortable as we look out to 1575 (target on the S&P) for next year. It doesn't seem out of line, but again we're continually adjusting these numbers as we watch how this liquidity crunch goes and we watch how the bond market unlocks, and we will be watching it on a weekly basis," he said.
Technical analysts were watching to see if the Monday low created by the failed House vote would hold. After a week of absorbing headlines and hanging on, Friday's dismal action signals there may be another leg down coming, said Scott Redler, chief strategic officer of T3Live.com.
"Basically, the market tried to pound out a bottom at 1110 to 1120 on the S&Ps and 10,300 to 10,400 on the Dow," said Redler. "Then the market consolidated for the rest of the week waiting to see the reaction and the passage of the Congressional bill, which actually had already been priced in."
Redler said there's a probability "we're going to see one more capitulation opportunity that would create a buying opportunity at Dow 9600 to 9800 and 1040 to 1050 on the S and P. We're not looking to sell into this last down move. We're looking for a major opportunities for the short and long term to buy into those levels."
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