U.S. stocks could see big swings to the downside
INSIDER
this week on any remotely "bad" news since volatility indexes are at
levels considered too low.
Investors also will face a blizzard of earnings, which many analysts
believe will continue to support the rally that began early this
month. But any disappointments in either earnings or outlooks could,
of course, trigger a sharp sell-off.
What's more, the market is likely to continue to garner support from
investors' hopes that the Federal Reserve will take more steps to
stimulate the economy, in what is known as "quantitative easing" or
"QE2." The Fed is expected to unveil its initial commitment under QE2
at its November 2-3 meeting.
The Chicago Board of Options Exchange (CBOE) Volatility Index, or VIX
.VIX, a gauge widely used to measure investors' anxiety levels, fell
2.54 percent on Friday to close at 18.78, its lowest level since
April. The VIX, which rose to near 50 in May, has been around or under
20 for the past two weeks.
Options traders note that there is a clear sign of extreme complacency
in the VIX and that it is making the market more vulnerable than
before.
"The 'market volatility' index will see a lot more volatility (this
week) since it is at such low levels now," said Steve Claussen, chief
investment strategist at online brokerage OptionHouse.com.
The iPath S&P 500 VIX Short Term Futures exchange-traded note, or ETN
(VXX.P) is also at a new 52-week low of 12.83. The ETN offers
directional exposure to volatility and is based off of the front
two-month VIX futures.
"If you look at VIX futures, investors seem to be always preparing for
something to trigger the volatility to spike up again, yet there is
nothing major in the immediate future that justifies that," Claussen
said.
The VIX futures were traded at around 21 for November and 24 for
December, but going into 2011, they were showing an increase of 40
percent, trading above 26.
The VIX, widely known as Wall Street's fear gauge, is a 30-day risk
forecast of stock market volatility. The index typically has an
inverse relationship with the S&P benchmark as it tracks option prices
that investors are willing to pay as protection on the underlying
stocks.
Last week, the VIX instantly shot up nearly 12 percent on Tuesday when
stocks suffered their steepest one-day decline since August after a
surprising rate increase from China.
EARNINGS ON CENTER STAGE
Earnings will remain the center of attention this week. Many analysts
predict that earnings will continue to support the market rally that
kicked off October. If more companies report strong results, that
could bolster sentiment, along with hopes for more Fed easing.
In the last week of October, 177 S&P 500 companies are due to report
their balance sheets, of which seven are Dow components. Among them
are energy giants Exxon (XOM.N) and Chevron (CVX.N) and technology
giant Microsoft (MSFT.O). For details on earnings schedule, see
<RESF/US>
S&P 500 earnings are expected to increase 28 percent for the third
quarter from a year ago, up from a growth estimate of 24 percent last
week, according to Thomson Reuters data.
"The earnings are expected to be good (this) week as well ... we are
not expecting any bad news out of there," said Peter Cardillo, chief
market economist at Avalon Partners, in New York.
But Cardillo said that negative news from economic data could spark
market volatility, especially as it would come just a week before the
November 2-3 meeting of the Federal Open Market Committee, or FOMC,
and in the week preceding the November 2nd mid-term elections.
Major economic data for the coming week includes existing home sales,
durable goods orders and third-quarter GDP.
Elliot Spar, an options market strategist at Stifel Nicolaus, also
said a sell-off could begin as early as this week in anticipation of
the Fed meeting and the mid-term elections.
"For those that are waiting for the 'sell on the news' event on
November 3 when the Federal Reserve Open Market Committee concludes
its meeting to discuss the prospect of another round of quantitative
easing, I believe that the sell-off in the market will start during
the week of October 25."
All three major indexes capped a third straight week of gains at
Friday's close. For the week, the Dow .DJI and the S&P 500 .SPX each
rose 0.6 percent while the Nasdaq .IXIC gained 0.4 percent.
From the technical viewpoint, a key support for the S&P 500 was seen
at the 10-day moving average, which was at 1,175 as of Friday.
"A clear one-day break of the 10-day moving average with a
follow-through to the downside the next day could be the catalyst for
a meaningful pullback in the market," Spar said.