JPMorgan, Wells Fargo report earnings. Can banks stop Wall Street's free fall?
Corporate earnings on Tuesday from major banks including Citigroup,JPMorgan Chase and Wells Fargo couldn't come soon enough for a stock market that lately has fixated on breached technical levels, signs of a softening global economy and Ebola.
"Lending has been missing in action; the Fed is bound and determined to try and raise inflation, and bank lending is a precursor to inflation," said Kim Forrest, senior equity analyst at Fort Pitt Capital. "We'll see what earnings have to bring."
On Monday stocks tanked, with the S&P 500 closing below its 200-day moving average and the Nasdaq Composite off 8.6 percent from its September record, continuing a slide that has stocks extending losses into a fourth week.
The "freak out started in technology with comments from the Microchip guy. Tomorrow we get to see if he's right, if it's an early warning sign or just that company has its own issues," Forrest said.
Microchip Technology on Thursday cut its sales outlook for the quarter and its CEO Steve Sanghi said an industry correction had started, prompting investors to flee semiconductor makers.
Intel should shed further light on the sector when it reports third-quarter earnings after Tuesday's close.
As investors fled stocks, they looked for short-term proction, with the Chicago Board Options Exchange Volatility Index, a gauge of investor uncertainty otherwise known as the VIX, on Monday rising to a 28-month high, after surging 46 percent last week.
"Volatility clearly is in the forecast, at least in the near term. I don't see any catalyst to cause volatility to calm down between now and the midterms," said Randy Frederick, managing director of trading and derivatives at Charles Schwab, of Nov. 4 elections that follow by only a week the anticipated end of the Federal Reserve's bond purchases, otherwise known as quantitative easing.
"What markets hate most is uncertainty, and nobody knows how these elections are going to turn out," Frederick said.
And while the market has priced in the final chapter of Fed tapering, it's not until the Fed stops buying bonds that they will be in a position to start saying when interest rates might go higher, another area of uncertainty for investors.
The end of tapering "opens the door to the next phase, or eventual tightening, pushing thoughts down the road a little. And there are those who believe the end of tapering will put the kibosh on equity markets," said Frederick, who excludes himself from that school of thought.
If you're a short-term trader, or an options trader, volatility brings opportunity and higher risk. If you're a long-term investor, Frederick advises "hedging and hanging on for the next couple of weeks."
"A regular investor who sees their life savings in this, they are completely freaked out, for which I have empathy. But volatility says markets are functioning; they always overreact in the short term," Forrest said.
"It's about uncertainty: The potential for weaker earnings, we're statistically overdue for a correction, September and October are not seasonally a good time of the year for markets. I don't see any major negatives, but I see a whole lot of small ones coming together," Frederick said.
