Next week could see some bargain-hunting in stocks as traders look for opportunities within sectors that have been hammered, or those that have potential upside from the government's rescue plan. The financial bailout plan was approved Friday, allowing the government to buy up to $700 billion worth of the illiquid assets that have been clogging up banks' balance sheets and operations. Its passage should ease constraints in the nearly frozen credit markets, and may even boost confidence across the board. In theory, banks will be able to do business with one another again and should be more willing to lend to consumers and businesses. Other sectors that stand to benefit from the bill, called the Troubled Asset Relief Program, or TARP, are alternative energy and those heavily vested in research and development. TARP provides major tax breaks for the development of nonfossil-fuel power and other so-called "knowledge-based" programs as part of an effort to steer the economy toward science and technology and away from the industrial and service sectors, where jobs are moving abroad. Manny Weintraub, founder and principal of money-management firm Integre Advisors, and former managing director of Neuberger Berman, says there are plenty of opportunities to be found. He notes that investors have hammered away at the embattled financial services sector, as well as highly leveraged utilities, and anything exposed to commodities, whose prices declined on a strengthening dollar and weaker economic outlook. "Oversold is one word for it," he says, "but demolished is another word."
John Rekenthaler, vice president of research at Morningstar, says that the bill's passage may indicate the beginning of the end of the bear market, but he notes that a recovery historically takes twice as long as the downturn. "I would hope if the bill passes that we're most of the way through this," he says. "But, there are more 500-point drops than 500-point rises. Panic seems to be a stronger emotion than optimism, or at least it works more quickly." With each day seeming to bring news of a snowballing economic decline, the market will continue to price in key concerns about earnings potential in an environment where credit is limited and pricey. GE's ( GE) downwardly revised earnings guidance last week could be an indication of more warnings to come, says Weintraub. While such announcements will help or hurt individual stocks or sectors, he expects the broad market to be affected mainly by credit conditions. "I think the important thing that people are watching are Libor and indications that banks are willing to lend to each other. That's the important thing," says Weintraub, referring to the London Interbank Offered Rate. "How can you expect economic data to be anything but bad?" The government jobs report on Friday confirmed what most had guessed -- the economy continued to shed jobs at a rapid pace in September. The government's weekly report on initial jobless claims next Thursday will provide evidence of whether contractions have remained severe so far this month. Household names, including consumer goods companies like Hanesbrands ( HBI) and computer-hardware company Hewlett-Packard ( HPQ), announced big job cuts last month. In light of those trends, Rekenthaler predicts that investors will start to look at economic fundamentals and away from the day-to-day turbulence, especially now that the TARP deal has been sealed. "I think attention is going to start moving more toward those
indicators and away from what's going on in D.C.," he says. Talk of a cut to the federal funds rate target has ramped up recently as lending costs have risen. The release of minutes on Tuesday from the Federal Reserve's most recent meeting could provide insight into how key policymakers plan to respond to the credit crunch, job losses and financial turmoil. Brian Dolan, the chief currency strategist at Forex.com, says the Fed minutes will likely be a "nonevent" in the stock market. He believes Fed Chairman Ben Bernanke's speech on Wednesday will provide a clearer and timelier indication of whether the agency will lower rates at the end of October. Dolan predicts that Bernanke "will signal that they're not, which will leave the markets extremely disappointed." Weintraub notes, however, that investors have been stunned by unexpected results, from the House turning down the TARP proposal the first time around, to Wells Fargo's ( WFC) unexpected offer to buy Wachovia ( WB), knocking out a government-supported deal already in place with Citigroup ( C). As a result, markets have remained volatile, with the Dow Jones Industrial Average plunging hundreds of points then reversing declines within a single trading session. Weintraub says it's nearly impossible to predict how stocks will fare on a short-term basis if unforeseen news and unexpected calamities continue to drive the market. "Any week," says Weintraub, "it's like, 'Will Monday bring a bankruptcy or restructuring?' And is that bad or good? You don't know what Monday will bring until it's Monday." Nobody ever made a dime by panicking, says Jim Cramer. Moneymaking opportunities exist despite the market turmoil. So where's a market master like Cramer putting his money these days? Check out his personal portfolio at Action Alerts PLUS. Take a free trial now.