The Markets This Week

October 12th, 2011


A search on the Website of the DSM-V, the abbreviation for the bible of psychological disorders, reveals no entry for “volatility fatigue,” but given its growing prevalence on Wall Street, there soon might be one.

The stock market again zigzagged through the week, in keeping with its schizophrenic nature since early August. Shares finished about 2% higher on the week, sandwiching a poor Monday and Friday around a strong midweek showing.

Money managers we spoke with, almost to a man and woman, threw their hands up in surrender and fatigue. This isn’t a fundamental market to pick stocks. The complaint goes along these lines: I can make confident picks about earnings, but not about whether or not there will be a full-blown euro-zone sovereign-debt collapse.

But we are only being partly facetious. As an anecdotal measure of the kind of volatility suffered since the market’s gyrations began Aug. 2, consider that in three of every four trading days since then, the Dow Jones Industrial Average has produced either a negative or positive triple-digit close. Roughly that translates into almost a 1% daily move.

Last week, the Dow closed at 11,103.12 up 1.7%, while the Nasdaq Composite finished at 2479, up 3%.

The Standard & Poor’s 500 index, in the way of technical analysis, did fall as low as 1075 briefly Tuesday, more than 20% down from its 2011 high of 1363.63, set April 29. It turned higher by the end of the day, thereby avoiding the technical definition of a bear market.

“We are getting into a pattern of seeing negative Mondays after troubling weekend news out of Europe,” says Brian Belski, the chief investment strategist at Oppenheimer.

In the main, the U.S. economic data were decent this week, supporting a move upward from mid-Tuesday on, he adds. On Friday, the U.S. Labor Department said employers added 103,000 jobs in September, above consensus. The nation’s unemployment remains at 9.1%.

Perhaps some semblance of normality—that is, where corporate fundamentals matter—will return this week as the third-quarter earnings season kicks off, with the first big report due from Alcoa (ticker: AA) on Tuesday.

A bullish Belski says that, with the market in a funk, the stage is set for an upside surprise from better-than-expected earnings. Consensus earnings have been dropping of late on concerns about the global economy.

When you see the heavy investor concentration in utilities, staples, telecoms and health-care stocks that has taken place recently, he says, a good earnings season could make for a “pretty decent” upward move.

Indeed, one of the more interesting contradictions investors face is that the outlook from corporate executives seems downright enthusiastic compared with the market’s gloom.

“The macro fundamentals have been overwhelming.” says Lloyd Khaner, who runs Khaner Capital Management, “Yet company fundamentals are not that bad. The market has been anticipating that things will get worse and pricing things quickly.”
It’s not as if there’s been a parade of third-quarter negative pre-announcements. Maybe investors will soon start to worry about the micro instead of the macro. That will seem like a relief.

THERE’S BEEN MUCH COMMENTARY about how U.S. stocks seem to be following the European sovereign-debt saga. With so many European government talking heads making almost daily comments, often contradictory ones, about how Greece’s debt problem will be handled, it’s no wonder investors are confused.

Investors know it’s been a case of the tail wagging the dog. Historically, it’s been the U.S. stock market that has led other world markets, but the extent of how closely the U.S. has followed Europe might come as a surprise.

The correlation seems extraordinary. While many S&P 500 companies get a big chunk of sales from Europe, you have to wonder if perhaps the U.S. broad market moves are exaggerated, given that it’s the European banks that are likely to be the most exposed to this issue.

Through Friday, Sept. 30, the S&P 500 had declined just over 16% from 1353 on July 7. Most European stock markets close by 11:30 a.m. Eastern time, and the performance of stocks in the U.S. when Europe has been open versus when Continental markets were closed has been striking, according to Bespoke Investment Group (Source: Barrons Online).

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