RPT-Wall St Wk Ahead: Stocks may dance to big swings, earnings

(Repeating column initially sent late on Friday)

By Angela Moon

NEW YORK, Oct 24 (BestGrowthStock) – U.S. stocks (Read more about the stock market today. ) could see big
swings to the downside this week on any remotely “bad” news
since volatility indexes are at levels considered too low.

Investors also will face a blizzard of earnings, which many
analysts believe will continue to support the rally that began
early this month. But any disappointments in either earnings or
outlooks could, of course, trigger a sharp sell-off.

What’s more, the market is likely to continue to garner
support from investors’ hopes that the Federal Reserve will
take more steps to stimulate the economy, in what is known as
“quantitative easing” or “QE2.” The Fed is expected to unveil
its initial commitment under QE2 at its Nov. 2-3 meeting.

The Chicago Board of Options Exchange (CBOE) Volatility
Index, or VIX (.VIX: ), a gauge widely used to measure investors’
anxiety levels, fell 2.54 percent on Friday to close at 18.78,
its lowest level since April. The VIX, which rose to near 50 in
May, has been around or under 20 for the past two weeks.

Options traders note that there is a clear sign of extreme
complacency in the VIX and that it is making the market more
vulnerable than before.

“The ‘market volatility’ index will see a lot more
volatility (this week) since it is at such low levels now,”
said Steve Claussen, chief investment strategist at online
brokerage OptionHouse.com.

The iPath S&P 500 VIX Short Term Futures exchange-traded
note, or ETN (VXX.P: ) is also at a new 52-week low of 12.83. The
ETN offers directional exposure to volatility and is based off
of the front two-month VIX futures.

“If you look at VIX futures, investors seem to be always
preparing for something to trigger the volatility to spike up
again, yet there is nothing major in the immediate future that
justifies that,” Claussen said.

The VIX futures were traded at around 21 for November and
24 for December, but going into 2011, they were showing an
increase of 40 percent, trading above 26.

The VIX, widely known as Wall Street’s fear gauge, is a
30-day risk forecast of stock market volatility. The index
typically has an inverse relationship with the S&P benchmark as
it tracks option prices that investors are willing to pay as
protection on the underlying stocks.

Last week, the VIX instantly shot up nearly 12 percent on
Tuesday when stocks suffered their steepest one-day decline
since August after a surprising rate increase from China.

EARNINGS ON CENTER STAGE

Earnings will remain the center of attention this week.
Many analysts predict that earnings will continue to support
the market rally that kicked off October. If more companies
report strong results, that could bolster sentiment, along with
hopes for more Fed easing.

In the last week of October, 177 S&P 500 companies are due
to report their balance sheets, of which seven are Dow
components. Among them are energy giants Exxon (XOM.N: ) and
Chevron (CVX.N: ) and technology giant Microsoft (MSFT.O: ). For
details on earnings schedule, see [RESF/US]

S&P 500 earnings are expected to increase 28 percent for
the third quarter from a year ago, up from a growth estimate of
24 percent last week, according to Thomson Reuters data.

“The earnings are expected to be good (this) week as well
… we are not expecting any bad news out of there,” said Peter
Cardillo, chief market economist at Avalon Partners, in New
York.

But Cardillo said that negative news from economic data
could spark market volatility, especially as it would come just
a week before the Nov. 2-3 meeting of the Federal Open Market
Committee, or FOMC, and in the week preceding the Nov. 2nd
mid-term elections.

Major economic data for the coming week includes existing
home sales, durable goods orders and third-quarter GDP.

Elliot Spar, an options market strategist at Stifel
Nicolaus, also said a sell-off could begin as early as this
week in anticipation of the Fed meeting and the mid-term
elections.

“For those that are waiting for the ‘sell on the news’
event on Nov. 3 when the Federal Reserve Open Market Committee
concludes its meeting to discuss the prospect of another round
of quantitative easing, I believe that the sell-off in the
market will start during the week of Oct. 25.”

All three major indexes capped a third straight week of
gains at Friday’s close. For the week, the Dow (.DJI: ) and the
S&P 500 (.SPX: ) each rose 0.6 percent while the Nasdaq (.IXIC: )
gained 0.4 percent.

From the technical viewpoint, a key support for the S&P 500
was seen at the 10-day moving average, which was at 1,175 as of
Friday.

“A clear one-day break of the 10-day moving average with a
follow-through to the downside the next day could be the
catalyst for a meaningful pullback in the market,” Spar said.
(Wall St Week Ahead appears every Sunday. Questions or
comments on this column can be e-mailed to:
angela.moon(at)thomsonreuters.com)
(Reporting by Angela Moon, additional reporting by Doris
Frankel; Editing by Jan Paschal)

RPT-Wall St Wk Ahead: Stocks may dance to big swings, earnings