Coming Week: Month's Ending, Volatility Isn't

October has been a spectacularly terrible month for traders to endure. Although the month comes to a close next week, investors probably won't get much relief from the market's extreme volatility.

Many traders likely can't wait for October to end. Thus far this month, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite have all fallen more than 20%. Though investors and market analysts typically look forward to the close of a month, they know the volatility probably isn't going to vanish after Halloween.

"When the month ends, what difference does it make?" asks Paul Mendelsohn, chief investment strategist with Windham Financial. "You still have the same economic problems. You're just in November. I do not buy that we're going to bottom in October because historically that's been the case. It's clearly different now."

Much of the volatility has been blamed on the liquidation of assets due to the deleveraging of hedge funds and mutual funds. Heading into last week, many analysts had hoped the indiscriminate selling would end.

However, nothing has changed, as this past week proved. Mendelsohn notes that bank loans and credit lines are being pulled on hedge funds and that investors are redeeming while the funds grapple with the tough task of deleveraging. In the coming week, analysts believe many of these funds will continue to search for a reason to buy, but may come up empty.

"The funds don't know how much cash they're going to have to use, so why buy something today if the market is going to go down?" Mendelsohn asks. "You've got all sorts of dynamics that lead me to the conclusion this puzzle is going to take longer to figure out. Just because it's the end of October, that doesn't change a thing."

Paul Nolte, director of investments with Hinsdale Associates, says he would have preferred to see volume explode as people unloaded stocks in the last week. "Instead, you're seeing the markets continue to decline on decent volume, but it's certainly not the capitulation volume you'd like to see," he adds.

One catalyst that could spark buying will come from the Federal Open Market Committee. The Federal Reserve's policy-making arm will convene on Tuesday for a two-day meeting on interest rates, with a decision to come Wednesday at 2:15 p.m. EDT. Earlier in the month, the central bank cut the fed funds rate by 50 basis points to 1.50% as part of a global effort to ease turmoil in credit markets.

"The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability," the Fed said in a statement on Oct. 8. "Some easing of global monetary conditions is therefore warranted. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures."

The consensus is for another 50-basis point cut at midweek, which would reduce the fed funds rate to 1%. Market analysts hope that another rate cut will thaw the freeze on interbank lending and that stocks could see a bid on renewed confidence, something that has been absent for much of the month.

" The Fed will continue to pump money into the financial system," says Nolte. "Eventually that hole is going to fill and we might get some traction. But the key, more than the monetary part, is establishing confidence between the banking brethren. Restoring confidence in the banking and credit systems will be the test for next week."

Mendelsohn says that the Fed has the responsibility to free up the credit market by driving the fear out. "Clearly, inflation is not an issue at this point, and it can go completely out the window," he says. "The Fed will have to focus on bringing the economy back to trend."

In addition to the FOMC meeting, the economic docket is filled with several crucial reports that will influence trading. The spotlight will shine brightest on the advance reading on gross domestic product for the third quarter. With economists expecting a decline of 0.1%, it could mark the beginning of what many pundits have proclaimed: The U.S. is in a recession.

"This will be the first look that you're going to get that says we are in a recession," said Nolte. "From a technical basis, you do need two reports of negative GDP growth to confirm we're in a recession. But that's an academic term, now. There's no magic number. We are in a recession."

On Thursday, weakness swept across the stock markets of Europe after the U.K. reported a 0.5% decline in third-quarter GDP, compared with expectations of a decline of 0.3%.

Mendelsohn says the negative GDP number in the U.K. kicked off multiple recession forecasts worldwide. "It would not at all surprise me for the U.S. to come in negative in the third quarter, bringing it from the U.K. to the U.S.," he said. "You're going to have a recession. You're going to show two quarters of negative GDP growth, at least."

Also on the economic docket, Monday's report on new home sales should show little change in September. Tuesday's report on consumer confidence should reveal a decline to a reading of 54 in October from 59.8 last month. The September read on durable goods orders will come out Wednesday.

Friday will bring several pieces of data, including reports on personal income and spending, the Chicago purchasing managers' index and the University of Michigan's consumer sentiment survey.

Market participants are hoping the burst of earnings reports in the coming week will provide equity markets with a much needed shot in the arm. As always, what the companies say about future earnings will ultimately drive the market. Dow component Verizon ( VZ) reports before the start of trading Monday, with several other companies set to report before and after the bell.

Tuesday's results will be headlined by U.S. Steel ( X), Martha Stewart ( MSO), Entergy ( ETR) and Valero ( VLO).

Wednesday will bring another busy earnings day, with Dow components Kraft Foods ( KFT) and Procter & Gamble ( PG). Comcast ( CMCSA), GRMN ( GRMN) and Sony ( SNE) are also set to report.

The same day, Visa ( V), JDS Uniphase ( JDSU) and Symantec ( SYMC) will report.

Thursday will bring earnings releases from Dow component Exxon Mobil ( XOM), in addition to Alcatel-Lucent ( ALU), Motorola ( MOT) and CVS Caremark ( CVS). After the close, Sun Microsystems ( JAVA) and video-game maker Electronic Arts ( ERTS) will headline the late reports.

Friday's release calendar is considerably lighter, with Chevron ( CVX) and NYSE Euronext ( NYX) headlining the reports.

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