Investors expect more gloom next week on Wall Street, which is plagued with uncertainty about whether plans to shore up the nation's banking system and housing market will actually work.
Bank of America
-- the two banking behemoths that pose the biggest risks to the system -- both plummeted as much as 36% Friday on fears the federal government could
them, dragging down more well-regarded names like
, the rest of the banking sector and the overall market.
The White House put nationalization fears to rest and stemmed the selloff, but not before the
Dow Jones Industrial Average
touched depths not seen in more than a decade and closed at its lowest level in more than six years. Troubled automakers
, as well as industrial giant
, hit multiyear lows.
Treasury Secretary Timothy Geithner's broadly outlined financial sector rescue plan calls for banks to undergo a
to determine whether they are healthy enough to survive as private entities.
reports that more details on that plan could emerge next week, and investors worry that some of the nation's biggest banks may not pass muster.
"The market's been trending down because it needs one of two things to happen," says Len Blum, managing director of Westwood Capital. "The nationalization of
Citigroup and/or Bank of America -- that would give some stability to the market because we would know the banking sector would have a bottom -- or finding bottom of housing market, which might take a little while longer."
Blum says that Geithner's plan is essentially "a Trojan horse" for bank nationalization, but until that is crystal clear, he expects the market to trade in a technical range, anywhere from 7,000 to 7,500.
Though housing will certainly take longer to discover a bottom, the Obama administration's
seeks to speed that process. Next week is chock-full of housing data, including the S&P/Case-Shiller Home Price Index for December on Tuesday, followed by existing- and new-home sales data for January on Wednesday and Thursday. All are expected to remain weak.
However, supply and demand fundamentals may have started falling back into place. Amid a glut of inventory and weak demand, housing starts fell to a record low last month. It will take time for the entire inventory to work through the system, and perhaps even longer to find a floor under home prices, especially in markets whose bubbles were most inflated.
"The situation we have now is a market that is concerned over the length and depth of this recession," says Robert Pavlik, chief market strategist at Banyan Partners.
Even if the Obama plan is a stunning success, his financial braintrust is predicting worse economic conditions and a drawn-out recession. The
on Wednesday lowered projections for economic growth while raising projections for unemployment. Former Fed Chairman Paul Volcker, who is on President Barack Obama's economic-recovery team, on Friday called it a "massive economic crisis," according to
. Volcker warned that "we're going to hear the reverberations about this for a long time."
Jamie Cox, managing partner at Harris Financial Group, believes that it will be at least six to eight months before the housing market makes any meaningful turnaround. He notes that short interest in bank stocks has surged, setting up another combustible dynamic. If big banks are taken over by the government, shareholders will suffer while shorts win out, but if not, shares may run dramatically higher as shorts run to cover bets against the firms.
worth zero or they're a powder keg," says Cox. "There's so much short interest in these stocks right now, and if they don't get nationalized, look out."
On the other hand, Cox notes that telecom stocks have been winners among the financial carnage due to light leverage, strong balance sheets and earnings. Dow components
were among the few trending upward on Friday.
Still, says Cox: "I don't think earnings matter anymore. They should, but fundamental analysis has gone out the window."
In a treacherous market like this, don't invest alone. Throughout the trading week on Stockpickr Answers, investing professionals respond to questions posed by members of the Stockpickr community. Next week's pro lineup includes Dan Fitzpatrick and David Peltier. For next week's full schedule, visit Stockpickr.com.