Stocks: Brace for a rocky week ahead

Stocks: Brace for a rocky week ahead

Investors await retail sales figures, and the latest readings on the health of the economy, with a close eye on the labor market.

Ben Rooney and Alexandra Twin, CNNMoney.com staff writers
November 29, 2008: 10:13 PM ET

NEW YORK (CNNMoney.com) -- Investors may be in for another challenging week as the market braces for the fallout from Black Friday sales and as a flurry of economic reports continue painting a dour picture.

"What would be more significant would be if stocks react positively [this] week in spite of bad news from the retailers," noted John Merrill, chief investment officer at Tanglewood Capital Management. "That would suggest that the market is starting to look forward."

Stocks managed gains in last week's holiday-shortened week, with all three major gauges rising after 3 straight weeks of declines.

The week ended with "Black Friday," the traditional kickoff to the holiday shopping season. Investors are expecting dismal retail sales as the weak economy continues weighing on household budgets.

Sales are going to be "really bad," predicted Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York. "The consensus is that parents will buy presents for their kids but not for each other."

But first results Saturday from retail research firm ShopperTrak RCT indicated a 3% gain in Black Friday sales from a year ago, although there was some concern about whether the sales could be sustained.

In addition, investors will be keeping an eye on a slew of economic reports, including readings on manufacturing, construction, factory orders and the labor market.

Thursday's weekly jobless claims report is "the only thing that matters [and] it's going to be a horror show," Rovelli said.

The jobs picture could get even darker on Friday when the government's closely watched monthly jobs report comes out. The unemployment rate is expected to climb to 6.8% from 6.5%.

Automakers will also be in focus amid growing bets that the industry will receive a government bailout after all. GM (GM, Fortune 500), Ford (F, Fortune 500) and Chrysler's pleas were rebuffed earlier this month, but the group will appeal to Congress a second time this week.

Over the past five days, the Dow gained nearly 10%, the S&P 500 surged 12% and the Nasdaq rose almost 11%. The Dow's winning streak marked the first time the blue-chip index held gains for five days in a row since November 2007.

Stocks had rallied last week as President-elect Barack Obama announced his economic team, and the government unveiled a plan to pump $800 billion into the economy to get banks to lend to consumers and small businesses.

The gains were a strong end to a brutal month. In November, the Dow lost 5%, the S&P 500 lost 7% and the Nasdaq lost 11%.
Economy

Monday: The Institute for Supply Management (ISM) releases what is expected to be a grim report on manufacturing in the morning. November ISM is expected to fall to a 26-year low of 38, according to a consensus of economists surveyed by Briefing.com, versus a reading of 38.9 in October.

Construction spending likely fell in October, with economists expecting the government report to decline by 0.9% after it fell by 0.3% in September.

Also on Monday, Treasury Secretary Henry Paulson will give a speech on the markets and economy at the Fortune 500 forum in Washington.

Federal Reserve Chairman Ben Bernanke is also speaking Monday. He will be in Texas, talking about the Fed's policies in the financial crisis at the meeting of the Greater Austin Chamber of Commerce.

Tuesday: The automakers have until Tuesday to submit proposals for how they would use $25 billion in taxpayer money to make their companies "viable."

The House Financial Services Committee holds a hearing next Friday on the proposals and the Senate Banking Committee is expected to hold a hearing sometime during the week too.

Separately Tuesday, monthly auto and truck sales figures for November will be released during the normal trading session. October auto sales were the weakest in 25 years. (Full story)

Wednesday: The ISM releases its report on the services sector of the economy. The November services sector index is expected to fall to 42.6 from 44.4 in October.

Payroll services firm ADP releases its report on private sector employment in November, ahead of the big national report Friday. Employers are expected to have cut 173,000 jobs from their payrolls after cutting 157,000 jobs in October.

Also, the revised reading on third-quarter productivity is due in the morning, while the Fed's "Beige Book" reading on the economy is due in the afternoon.

Thursday: Factory orders are expected to have fallen 2.7% in October, when the government releases its report in the morning. Orders fell 2.5% in September.

The weekly jobless claims report is due in the morning, as well as November sales from the nation's retailers. October sales were disastrous as retailers continue to struggle with attracting consumers in an economic downturn. (Full story)

Also, before the market opens, luxury homebuilder Toll Brothers Inc. (TOL, Fortune 500) is slated to release its quarterly financial report. Toll gave a glimpse into its state of affairs in early November, when it said revenue dropped 41% but also noted it had enough cash on hand to weather the turmoil.

Bernanke is scheduled to speak about housing and housing finance in Washington, D.C., at the President's Conference on Homeownership and Mortgage Initiative.

Friday: The November jobs report is released in the morning. Employers are expected to have cut 300,000 jobs from their payrolls after cutting 240,000 in the previous month. The unemployment rate, generated by a separate survey, is expected to have risen to 6.8% from 6.5% in the previous month.

Source

Why Such Wild Market Swings In Last Hour?

For years, the rap on professional basketball games has been that nothing exciting happens until the last two minutes.

Now the same might be said of the U.S. stock markets.

In the last year or so, investors have started to see sessions with massive moves in the waning minutes. Since Sept. 15, a day after Lehman Brothers collapsed in bankruptcy and Merrill Lynch (MER) sold itself in desperation to Bank of America (BAC), the trend has been amplified -- there have been dozens of last-minute selloffs and buying sprees.

Last Friday was a prime example. After wavering in and out of positive territory all day, the markets took off with about an hour left in the session after news broke that New York Federal Reserve Chairman Timothy Geithner was going to be nominated as the next Treasury Secretary.

The Dow Jones Industrial Average surged nearly 500 points in about an hour.

At least, that move was ostensibly prompted by news.

Consider Oct. 16, when the Dow jumped 401 points -- nearly all of it in the last few minutes -- after being down more than 400 points earlier in the session.

Here’s what Michael James, senior equity trader at Wedbush Securities, told FOXBusiness.com that day: “There’s very little rhyme or reason to these moves. Emotion and sentiment are driving the markets in both directions.”

On Oct. 28, the Dow rose 889 points, most of it in the last hour. Here’s James again: “It was pretty hard to figure out why we were up 400 points … let alone 900 points. Sellers completely walked away and there was a massive scramble to buy stocks … It was feeding on itself in the last half hour.”

November has been a lot of the same: On Nov. 13th the Dow rose 400 points in the last hour. The next day it fell 350 points in the last half hour.

The reasons for the late day madness are both technical and emotional.

Art Hogan, chief market analyst at Jeffries & Co., said the shift away from human oversight to electronic trading systems has contributed significantly to the wild late-day swings.

Computers are programmed to respond to certain triggers, such as selling or buying a stock when it hits a certain price, and they will respond no matter what. Humans are obviously more capable of discerning between panic and euphoric buying and selling.

The phasing out of specialists -- essentially market traffic cops who for decades patrolled the floor of the New York Stock Exchange -- has made it “hard to keep a fair and orderly market. It’s an unintended consequence of electronic trading,” said Hogan.

Another important dynamic has been fund managers under order to “raise cash.”

Aware that many of their investors are looking to get out of equity markets, fund managers have found themselves in need a certain amount of cash at the end of the day in order to fill redemption orders.

If by 3 p.m. the fund manager hasn’t raised enough money to cover his redemptions, it’s time for a reassessment in strategy, one that usually includes a far more aggressive approach.

“At that point you take the gloves off,” said Hogan. “You tend to sell stock indiscriminately and sell what you can, not what you want. There is no thought of fundamentals, you’re simply raising cash.”

Richard Peterson, an author and expert on investor psychology who recently opened a $10 million hedge fund with his firm MarketPsy Capital, explained how the technical can quickly turn emotional.

“Friday was really stunning,” he said, referring to the powerful and unexpected buying spree in the last hour of trading on Nov. 21.

It’s a situation that has played out over and over again in recent months as the financial crisis has left investors nervous and fearful of being caught on the wrong end of a trend.

“It’s forced buying and selling that cascades on itself,” said Peterson.

On Nov. 21 two pieces of information were in play -- Geithner’s pending nomination and optimism that a government rescue was in the works for Citigroup (C). In any case, investors began buying and others quickly got on board.

Peterson said the sudden swings tend to occur when “there is anticipation for the resolution of some set of uncertainties,” in Friday’s case who will replace Treasury Secretary Henry Paulson and what will stop the bleeding at Citigroup.

“People start betting one way or the other toward the end of the day, then others feel there must be an answer, that somebody knows something they don’t,” said Peterson. “In a really chaotic market, people take information from price -- they get their sense of where things are going from the price of the stock, not from any news.”

In other words, investors are getting “their cues from what other people are doing. They don’t have a clue so they watch what others are doing,” he said.

Market watchers say what’s really needed is consistency, a string of measured gains -- 75 points, 80 points, 90 points -- to start laying the groundwork for a genuine sense of stability and confidence.

It would be a welcome replacement for the fear-triggered volatility that has been giving investors whiplash for months.