If traders were bored with the stock market's meandering over the last week, the next five sessions promise to deliver more excitement and volatility thanks to quadruple witching.
Friday represents not only options expiration, which usually indicates more volatility than usual, but it is also the second quadruple witching day this year. Quadruple witching occurs when contracts for stock index futures, stock index options, stock options and single stock futures all expire. This can lead to dramatic moves in the equity markets.
Paul Mendelsohn, chief investment strategist with Windham Financial, said the quadruple witching is "the most important thing happening" next week because of the volatility expected.
"This is a major options expiration after a major move in the market we've had," Mendelsohn said. "The market is overbought here, so it'll be interesting to see if the expiration leans to the side of more buying or selling. This will make next week very, very interesting and equally busy."
In addition to quadruple witching, investors will have their hands full with a flurry of economic reports, some key earnings reports, and speeches from several
officials. On top of that, traders will have to continue to monitor rising interest rates and commodity prices, as well as moves in the U.S. dollar and other currencies.
Last week, an auction of 10-year Treasury notes saw a high bid of 3.99%, which pushed the 10-year bond yield briefly above 4% before it pulled back. In addition, crude oil topped $73 a barrel for the first time in seven months. Some market analysts have worried that rising rates and commodity prices would stall any recovery effort.
"This is all going to continue to be very important," Mendelsohn said. "You have prices going up, but the demand isn't quite there yet, so it's working against itself. This is because people fear the dollar will crater here. Rates, equities and commodities can keep rising together for a while, but at some point one of them is going to fail. It's just a matter of how far you have to go until the fundamentals catch up."
The economic docket will feature several reports that will help investors gauge the health of the housing and manufacturing sectors and will also give a read on whether inflation has remained contained.
The week's economic schedule kicks off Monday with the June read on the New York Fed's manufacturing index. Economists expect the index to come in at minus 2.1%, which would be a slight improvement from the minus 4.6% read in May, which was the highest level since August.
Also, the April report on net long-term capital flows will be published, with economists expecting a decline to $52.9 billion from $55.8 billion the previous month. In a nutshell, the data are expected to show that foreign investors lessened their demand for U.S. financial assets.
The data "will show capital flows," Mendelsohn said. "That will be very significant, in my view, because we'll see the capital movements between the countries."
Several reports will land Tuesday before the start of trading. At 8:30 a.m. EDT, housing starts and building permits are expected to have risen to 490,000 and 500,000 in May from 458,000 and 498,000 in the prior month, respectively, showing a mild improvement in the housing sector.
At the same time Tuesday, the Labor Department will post the producer price index for May. The PPI is expected to have risen 0.4% in May, while the core number, which excludes food and energy, should increase 0.1%. Later in the morning, at 9:15 a.m., the Fed will post industrial production and capacity utilization data for May, which aren't expected to change much from April's levels.
Wednesday will bring the Labor Department's consumer price index, which will show inflation at the consumer level, a concern for some investors who fear the central bank will have to raise interest rates to combat rising prices. The good news is that economists estimate the headline CPI number declined 0.9% in May and the core number rose only 0.1%, vs. 0.3% in April.
Thursday will see the release of weekly initial jobless claims, followed by the Philadelphia Fed's manufacturing index, which should improve in June to a reading of negative 16.4 from minus 22.6 in May, as well as the May report on leading economic indicators.
While many will sift through the data for signs of a recovery, Lawrence Creatura, a portfolio manager at Federated Clover Capital Advisors, said that much of the data will be "a big yawn" for a lot of people.
"What they're waiting for is bottoms-up confirmation of the health of the companies that underline the stock market," Creatura said. "They want corporate earnings and management commentary and color. That's what will define what is investible and what isn't."
In addition to the torrent of economic releases, several Fed officials will deliver speeches throughout the week on topics ranging from banking regulation to economic policy and market developments. Fed Chairman Ben Bernanke will speak at the Operation HOPE Global Financial Literacy Summit on Wednesday.
On Monday, Fed governors Daniel Tarullo and Elizabeth Duke will make speeches, and Kevin Warsh will speak Tuesday on economic policy.
Elsewhere, the quarterly earnings release schedule is as slim next week as it has been in the last few weeks, although some very recognizable names are on deck, ranging from retail and technology to transportation and automotive companies.
Research In Motion
are among the small number of companies set to report results over the next five sessions.
In other stock news, some major U.S. banks plan to begin repaying government bailout funds on Wednesday, according to
The Wall Street Journal
, which cited people familiar with the matter.
are among the firms that are expected to repay the funds they received from the Troubled Asset Relief Program, the report said. The firms received $25 billion, $10 billion and $3.4 billion, respectively.
Mendelsohn, though, isn't convinced financials will be the sector to watch next week. "This won't make much of a difference," he said. "That's already built in to the market."