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Coming Week: Searching for Sanity

Stocks in this article: hd low f

Investors expect another volatile set of trading sessions next week, as they keep their sights pinned on decisions emerging from Washington and clues about how poorly the economy is faring.

Last week brought several trading days of bottom-searching and dead-cat bounces, as the Dow Jones Industrial Average traveled in a range of 1,265 points, from its high end to the low. The bears ultimately won, and the index closed out the week with a loss of more than 440 points, or 5%.

Several regulatory factors may come into play next week, as lawmakers grapple with how to handle the fate of troubled automakers GM (GM - Get Report), Ford (F - Get Report) and Chrysler, and the Federal Reserve considers even further cuts to its key rate target.

The Fed embarked on a massive rate-cutting campaign last year, but held off over the summer as inflation surged amid rising commodity prices. Now that crude oil and other commodities have come down tremendously, deflation is the concern, making further interest-rate cuts a more palatable option.

That is especially true since interest rates for consumer loans, whether on mortgages or credit cards, have remained stubbornly high.

"Oh yeah, without a doubt," says Kevin Shacknofsky, co-portfolio manager of the Alpine Dynamic Dividend Fund, when asked whether the Fed is likely to slash its rate further from the current 1% target. "We're going to get further cuts until we get to zero."

Two key indicators next week will provide evidence of whether the economy is officially in a deflationary setting yet. The producer price index will be released by the Commerce Department on Tuesday, followed by the consumer price index on Wednesday.

Housing starts to be released on Wednesday may also give clues about how hard homebuilders are working to correct drastically high inventory levels, though Shacknofsky notes that housing data are seasonal, with the market placing more emphasis on what happens in the spring.

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