How much worse can get it? It’s a question no investor wants to address, but with the Dow coming off a series of triple-digit losses, it’s one that demands at least a guess.
Over the last few days, many issues were making investors uneasy, including concerns about Europe, the culture in Washington and the employment situation.
Now, as traders venture into the new week, there’s a lot at stake. “We might be dealing with Armageddon,” says Jim Paulsen, chief investment strategist at Wells Capital Management. On the other hand, he says, “if we put this nightmare to bed, you’ll be left with a good earnings situation, two positive-GDP quarters, positive manufacturing – and by the way, you have a 10% cheaper market.”
It might get cheaper yet. “Ten thousand” is a number that resonates with traders; the index dipped below the benchmark only to recapture it before Friday’s close. But from a technical perspective, the next resistance level for the Dow is much lower -- 9600 -- and most of the Street predicts the index could dip as low as 9500, which is the 200-day moving average, says Anu Sharma, managing director of the Nasdaq Market Intelligence Desk.
“There’s just this nervous feeling across the market that something big is going to happen,” he says. “People are on their heels and ready to take profits -- there’s just too much negative sentiment.”
Of course, all of that could change with next week’s headlines. Here’s a look at five issues traders should monitor this week.
Every Federal Reserve statement in the last half a year has been dissected for signs of when and how the government will stop the flow of stimulus efforts, the so-called exit strategy. Traders have been hanging on small changes to wording and any other indication that the Fed is shifting gears. They would be wise to stay tuned.
Federal Reserve chairman Ben Bernanke will testify before Congress on Wednesday, Feb. 10 at 10 a.m., on the process of unwinding the Fed’s emergency programs, the House Financial Services Committee said on Friday.
“Depending on what he says – it’s something everyone is concerned about – it might take a lot of attention,” Paulsen says.
The most recent drop in the Dow came after troubling reports from Old World economies. They’ll remain in focus next week.
The European Commission said on Wednesday that it plans to keep close tabs on Greece’s plans to trim its deficit. Separately, Spain lifted its projections for its own annual budget deficits through 2012. And Portugal said it received a disappointing response at a Treasury bill auction.
“There’s a lot of banter about Greece, Spain and Portugal,” says Sharma. “I think the focus will be there, and if it looks like the European economy is having any issues, in terms of debt and sovereign funds, the markets will continue to sell off.” Conversely, if Europe stays quiet, the markets could flatten out a bit, he says.
Investors will continue to take some cues from unemployment figures. Weekly jobless claims have risen by more than expected for the last four weeks making next week’s Thursday release a key event.
On Friday, the government released mixed monthly data. The economy unexpectedly lost 20,000 jobs in January, but the unemployment rate dipped – also unexpectedly – to 9.7%. Stocks fell Friday, despite the decline in the unemployment rate, “because people aren’t buying into the unemployment number,” says Sharma.
“We’ve seen the jobless claims number stay flat or even rise, and then the unemployment rate falls,” he says. “People are going to look [at next week’s number] and ask whether it jives with the unemployment number. If so, there might be a light at the end of the tunnel.” If not, the report could add more uncertainty to the employment situation.
Another key question for traders next week is whether consumers are spending. The government’s last retail report showed a drag in December – the crucial holiday season – despite seemingly upbeat reports from key retailers.
Next Thursday, economists expect to see that retail sales climbed 0.4% in January – with and without auto sales – after that year-end lull.
Separately, the University of Michigan’s preliminary February reading on consumer confidence is scheduled to be released on Friday. Economists predict a slight bump to a reading of 74.8, up from a January reading of 74.7. If the index moves in any unexpected way, it could have an impact on the market, Paulsen says.
Of course, what’s on consumers’ minds now is anybody’s guess because the data have been mixed. “We’ve had better results from retailers across the board, we had a fourth quarter gain in GDP, and people are getting their third positive 401(k) statement in a row,” Paulsen says. On the other hand, last month, a lot of consumers lost their jobs.
No, earnings season isn’t over. In fact, two Dow components, Coca-Cola (KO) and Disney (DIS), are scheduled to report next week. Those companies are expected to report earnings of 66 cents a share and 39 cents a share, respectively, based on analysts surveyed by Thomson Reuters.
But is anyone paying attention? Maybe not. “I think they’ll start to take on ‘also ran’ status,” says Paulsen. “We have a big enough sampling that we pretty much know how the quarter went.”
Nonetheless, outside of the Dow components, an interesting stock to watch for earnings might be homebuilder Pulte Homes (PHM), which could offer insight on the state of the housing sector. The company is expected to report a loss of 19 cents a share, but its outlook could be as interesting as its results.
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