Any shopping list for next week should include Tylenol, a bottle of whiskey and a bucket.
If Friday's choppy trading session was any indication, the volatile clash between the bears and bulls will typify trading for a while. The fight over the placement of a market bottom will continue next week. Expect Thursday's lows on the
Dow Jones Industrial Average to be tested, if not revisited, specifically the two-year closing low of 9389.48 and the intraday stumble to 9106.54.
So, go ahead and ask the trillion-dollar question: "Have the markets hit a bottom?"
OK, so some of the classic bottom signs happened this week. Volume was heavy on both Thursday and Friday, a good sign that activity has returned.
magazine put the economy on the cover, a sign that awareness has spread beyond the confines of downtown New York City. Certain relatively strong areas, like biotech, got taken out. And mutual fund redemptions have been on the rise.
All of those things point to a bottom. But this is a tough market to convince, one that's been fooled after each new set of lows.
Time will tell, but Dan Ascani, president and director of research at
, thinks the process is beginning. Whether that process can be completed has yet to be seen. Expect next week to be a rocky one. In fact, buckle up until April 16 is in the rearview.
"Next week, we ought to be backing and filling some more," he said. "You'll probably see another new low. The bottoming process will probably last until tax time. Then we should be in the clear."
Right now, according to Ascani's information, the stock market is at one of the most oversold levels in decades, hitting a painful point that has occurred only six times in the past 30 years. As with
Robert Downey Jr.
, hitting a bottom takes some time. Don't think one messy little bout with weakness is enough to scare off these bears. They're still bloodthirsty and willing to scrap for a while.
And don't be concerned if the Dow swings around like a kite in a tornado. Ascani says that investors should not get alarmed if the Dow makes a 2% to 3% drop next week.
"The market bottom shouldn't be viewed as a single event," he warned. "It's a process, especially around tax time. This won't be a V-shaped bottom. We can see that."
Follow the Leader (If You Can Find One)
It could be the influence of
George W. Bush's
presidency, but this market has lacked leadership for quite some time. Defensive stocks showed the way for a spell before faltering. But essentially, everything's been first-grade penmanship -- messy and all over the place.
Leadership is key, however. It can show you exactly how much pain is yet to come. If technology, financials and banks start to come off their lows and rally, then that's a decent sign that a bottom is close at hand. Then again, if defensives like drugs, insurance and energy start going green on the ticker, it's a sign that people aren't fully convinced.
Ascani is cautiously optimistic. If this is a bottom, he sees a nice rally in the works.
"By summer we should see the
Nasdaq back to January highs of 2900 before we get into trouble again."
Wait a Minute! I've Heard All This Before
Just because the light seems to be at the end of the tunnel doesn't mean the whole thing couldn't cave in, crushing everyone. This may not be a bottom if the
Federal Reserve and the market can't get on speaking terms again.
"There are two things the market hates," said Ascani. "One is uncertainty and the other is illiquidity. And, believe it or not, it hates illiquidity more. And it's got both right now."
For the uninitiated, liquidity refers to the ease of conducting a transaction. High levels of liquidity make it easier to sell and buy things. When the Fed cuts the
fed funds rate, it increases liquidity by making money cheaper, making it easier to buy things and sell things. But right now, the U.S. economy is experiencing a little liquidity crunch.
It's a dangerous situation. One look at Japan drives home the liquidity problem. That country has a horrible liquidity crunch, making it very difficult to grow profits. The main Japanese currency, the yen, has been sliding against the dollar. The net effect of the yen drop only drags the Japanese economy down because debt is usually tracked in U.S. currency. Debts get more expensive with every yen stumble, making it harder to show growth.
Unlike the U.S. central bank, the
Bank of Japan
cannot do very much to bail out business. The lending rate is already about as low as it can go. There's very little breathing room. You see, back when the Japanese economy, the second-largest in the world, and the
began to crumble, the Bank of Japan reacted late and in small increments. It only exacerbated a problem that has yet to be solved. "Japan's a perfect example of waiting too long," Ascani opined.
Simply put, if the Fed doesn't do anything to solve the impending liquidity crisis in the U.S., don't look for the markets to rally. The market is screaming for more liquidity and the Fed needs to pay attention, or equities will get hit again.
"We get another quarter
point in April before the
meeting whether the Fed likes it or not," he said. "The market decline is digging into the economy. And if the market doesn't get what it needs, it will sell off more."
Meanwhile, in Economic News...
Sure, economic news comes out next week but it'll run second to all the stock watching. As many people already know, the economy is slowing down and threatening a recession. Will the Fed cut before the May 15
Federal Open Market Committee
Possibly, but next week, pay attention to the trend in numbers rather than the individual data points and Fed speculation. This week shouldn't feature anything earth shattering enough to provoke the Fed. Many are checking out the first week of April, when the
National Association of Purchasing Managers
purchasing managers' index, twin surveys of spending in both the manufacturing and
University of Michigan
consumer sentiment figures are expected to come in a little higher, at 91.8, from February's low mark of 90.6. In the past six months, sentiment has fallen sharply. A sign of strength here could be taken as a sign that consumers are feeling better about the economy. Unfortunately, that would send a signal to the Fed that the economy is still rather strong and a rate cut unnecessary.
"The two things to pay attention to will both be released on Friday," said Drew Matus, senior economist at
. "We'll get consumer sentiment numbers for March on the very same day as
Alan Greenspan's been looking at both of those. Also, another look at the
Chicago purchasing managers' index. All three of those things. That's the day to watch."
That said, don't overlook Tuesday, either. February
durable goods orders, spending on big-ticket items like cars and appliances, come out, as do the
consumer confidence figures, which are two areas that Fed watchers pay close attention to. Especially consumer confidence, which Greenspan has gone on the record mentioning as a critical area. If consumer confidence falls into the toilet, so does consumer spending. The consumer confidence numbers are expected to come in at 104.2, down a bit from the previous 106.8 -- not a flushable move by any gauge.
"The most important numbers next week will be
The Conference Board
confidence numbers," said Peter D'Antonio, economist at
Salomon Smith Barney
. "We have it slightly up with no fallout from the equity selloff, because this survey was done before the market declined. It's important. We don't really know what's going to happen. Greenspan doesn't want to see a breach of confidence."