NEW YORK (
) -- Market participants were humming along Friday, with only a deluge of earnings reports and some macroeconomic figures awaiting them in the coming week.
That is, until, the market was rocked by news that the
Securities and Exchange Commission
, putting Goldman's first-quarter earnings release and subsequent conference call next Tuesday in more focus.
Investors watched the
plummet 126 points in the wake of the allegations, though some say the average was due for a down day after six straight higher sessions. Not surprisingly, bank stocks led the nosedive Friday, as the KBW Bank index lost 3.5% during the session.
Observers, meanwhile, digested a
that leaves more questions unanswered. The charges will probably galvanize those calling for financial regulatory reform in the coming weeks. In other words, analysts say look for uncertainty to cast a pall over the market as the new week begins.
"We have this event happening in the financial sector, and investors are looking for a reason to take profits. That's what's happening in the short term," said Art Hogan, chief market strategist at Jefferies, about the Goldman charges. "You'll have an over-reaction and a lot of selling of financials in general. It appears we're going to have a 'shoot first, ask questions later' kind of trading for the next couple of days, until we figure out the magnitude of what's going on."
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"What we're looking at, at a minimum, is headline risk," added Phil Orlando, chief equity market strategist at Federated Investors. "And given the fact that we hit a new cycle high yesterday, investors are absolutely using this as an opportunity to lock some profits in."
Though the financial products at play were complicated, the alleged scheme laid out by SEC enforcement chief Robert Khuzami on Friday was simple. The SEC alleged Goldman failed to disclose to investors a hedge fund's bet against a synthetic collateralized debt obligation that tracked a portfolio of subprime mortgage-backed securities, despite the hedge fund's role in picking the very bonds in the portfolio.
Goldman called the charges
"completely unfounded in law and fact," saying it will "vigorously contest them." Still, the dramatic selloff Friday has some wondering whether this marks an end to the bull market or whether Friday's pullback was just a mild breather.
"Goldman remains a bellwether, along with
Bank of America
which reported this week, as a viewpoint on how the financial sector has been healing, and largely it's been healing pretty well. But this certainly puts a potential roadblock in performance from here. It's a bit troubling, no doubt," said Bruce Zaro, chief technical strategist at Delta Global Advisors, who still views the Goldman driver as a one-off event.
"We've been in greatly overbought conditions," he added. "This could be the pause that refreshes. I was a little bit worried that we were going to have some sustainability during this earnings season with probably three to four weeks to go. So, what this does is puts a bit of pause in that, and hopefully it will be a pause that refreshes as opposed to changes the trend and marks the top. It would seem to me, then, that would be a little premature in the earnings cycle."
But all agree fundamentals are key and may serve as a guide to markets in the coming week. Economic data will be light, though. The few reports to garner attention include the Conference Board's leading indicators read on Monday, new jobless claims and wholesale inflation data on Thursday, and durable goods orders on Friday.
The housing sector will also be in focus next Thursday and Friday when the Commerce Department unveils its latest existing- and new-home sales figures for March. The consensus forecast anticipates new-home sales to edge higher to an annual pace of 320,000 units after hitting 308,000 units the month before. This follows separate news this week that
housing starts hit their highest point since November 2008.
"The reality is that home sales for March got a bounce because February was such a disaster in terms of the weather," said Brian Bethune, chief U.S. financial economist at IHS Global Insight.
On durable goods orders, he added, "by my sense of it, we'll probably get a pretty good number. It's not going to blow the socks off of anybody, but it'll still be a good number. And if we see that through into real growth, we'll get a pretty good overall growth picture for the first quarter of 2010."
A downpour of earnings news from blue-chip names like
Johnson & Johnson
is expected as well.
suggested corporate spending was picking up in its own earnings announcement last week. That puts the tech sector squarely in the crosshairs in the coming week, with
set to release their figures. Internet search firm
will also report after Tuesday's closing bell.
While Orlando is expecting a "blowout" result from Apple, which is forecast to show a profit of $2.43 a share late Tuesday, Zaro will be looking for other signs.
"It will be interesting to see if there's any comment from the CFO and also from
CEO Steve Jobs to see if they've got plans or they can clearly illustrate their path into the enterprise sector," said Zaro, whose firm owns Apple and believes it could approach $275 to $300. "That's where Apple becomes very interesting, if they can make that jump. A lot of people think they can. It's likely to be a trick, but if they can do it, that brings a whole new market for them."
Despite the Goldman stumbles, headlining financial names like
will join Goldman in reporting results. Goldman is expected to report earnings of $4.01 a share, bettering the year-ago EPS of $3.39 a share.
The news will come fresh on the heels of
Bank of America's
estimate-topping release, which highlighted its improving credit quality.
First-quarter offerings will also come from regional players
similar Goldman legal imbroglio ensnares other financial players is yet to be seen. But some believe that financial stocks may continue to feel the Goldman overhang despite promising profit announcements, as investors internalize the full repercussions of the charges.
"I think the fundamentals are fine," Orlando said of the sector. "Whether or not the fundamentals actually drive financial stocks higher now in the aftermath of this cloud is a completely different story, so what we have to do over the next couple of days is figure out the validity of these charges."
-- Written by Sung Moss in New York