Stocks face another turbulent week as the third quarter winds down

3 weeks ago
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A trader works wrong a station connected the level of the New York Stock Exchange (NYSE), August 27, 2021.

Brendan McDermid | Reuters

After caller turbulence, markets are apt to adjacent retired the last week of the 3rd 4th with different bout of volatility.

Stocks successful the past week traded with large extremes. First, fears of fiscal contagion coming from Chinese developer Evergrande sent stocks skidding Monday. Losses were reversed by Thursday, erstwhile the marketplace ripped higher. The S&P 500 and the Dow Jones Industrial Average were affirmative for the week, portion the Nasdaq eked retired a gain.

"I deliberation this marketplace turmoil has yet to conclude," said Sam Stovall, CFRA main concern strategist. "Certainly September is doing what it usually does. It frustrates investors."

The 3 large banal indices were besides higher for the 3rd 4th truthful far.

Strategists accidental however the marketplace trades successful the coming week whitethorn beryllium the astir important development, aft the chaotic swings successful stocks and besides the accelerated emergence successful Treasury yields precocious successful the week. The 10-year, astatine astir 1.3% connected Wednesday changeable up to astir 1.46% by Friday.

The S&P 500 was down astir 1.4% for the period of September truthful far. "We are getting agelong successful the tooth. The method indicators are pointing to distribution. We're seeing prices rotation over, breadth rotation over. You're seeing sentiment rotation over," said Stovall. He said the breadth needs to improve, and galore stocks are trading beneath their 200-day moving average.

October is simply a 'seismic' month

"I deliberation October volition beryllium existent to itself, which is simply a precise volatile month. October's volatility is 36% higher than the mean of the different 11 months of the year," Stovall said. "Volatility is higher and you person a greater fig of pullbacks, corrections and carnivore markets that either commencement oregon extremity successful the month. It is simply a seismic month."

Wealth absorption steadfast Wellington Shields warns that the information galore stocks person fallen beneath their 200-day moving mean is simply a antagonistic for the market. Just 59% of the stocks connected the New York Stock Exchange stay supra it, oregon successful an uptrend, according to the firm. The 200-day moving mean is the mean of the past 200 closing prices of a banal oregon index, and it's viewed arsenic a momentum indicator.

"The regularisation is that erstwhile this 200-day fig drops from supra 80% to beneath 60%, it usually goes beneath 30%. Forgetting that, the existent constituent is that portion astir stocks whitethorn beryllium advancing, hardly much than fractional are advancing capable to beryllium successful uptrends. With the marketplace conscionable a fewer percent beneath its highs, this is simply a concern," Wellington said successful a note.

What to watch

In the coming week, determination are a fewer cardinal economical reports including including durable goods Monday and ISM manufacturing Friday. There is besides idiosyncratic depletion expenditure information Friday, which the Federal Reserve monitors for its ostentation index.

The Federal Reserve volition stay a large absorption successful the week ahead. There volition beryllium a big of Fed speakers, including Fed Chairman Jerome Powell who testifies doubly earlier Congress connected the pandemic and the argumentation effect to it. Treasury Secretary Janet Yellen volition articulation him for the hearings Tuesday and Thursday. Powell besides appears connected a European Central Bank sheet with different cardinal slope leaders Wednesday.

Investors volition besides beryllium watching Congress successful the week up arsenic it attempts to walk a backing program successful clip to avert a authorities shutdown Oct. 1. The indebtedness ceiling is expected to beryllium portion of that debate, but strategists bash not expect it to beryllium resolved astatine the aforesaid time. They accidental this could bent implicit the markets for respective weeks earlier Congress raises the indebtedness ceiling.

Fed speakers are not expected to supply immoderate caller information, but they could good tune their connection aft the cardinal slope signaled this past Wednesday that it expects to statesman paring down its $120 cardinal successful in monthly enslaved purchases soon. The Fed besides released a caller forecast for involvement rates, which revealed that fractional of the 18 Fed officials expect to rise involvement rates adjacent year.

"I deliberation what the Fed's achieved truthful acold is simply a taper without a tantrum," said Marc Chandler, main marketplace strategist astatine Bannockburn Global Forex.

"I deliberation a batch of radical who put successful the marketplace person a consciousness they are skating connected bladed ice, and immoderate ace could beryllium a large one... radical are highly delicate and tense due to the fact that they cognize valuations are stretched," helium said. "That means we should expect these episodic jumps successful volatility."

Chandler said the marketplace volition request to digest the caller moves, peculiarly the determination higher successful Treasury yields.

"What we've got to hold for present is uncovering this caller equilibrium. What benignant of marketplace should we expect? Trending? Or bash we effort to find a range?" helium said. "I deliberation we find a range. We request immoderate hurdles to pass." Chandler said 1 hurdle is the September jobs study connected Oct. 8.

The Fed is expected to taper its $120 cardinal monthly enslaved purchases unless determination is shockingly anemic employment data. "That is the lone happening that stands successful the mode of Fed tapering," Chandler said.

Wells Fargo's Michael Schumacher, said the 4th extremity could beryllium quiescent successful presumption of large funds rebalancing. "The equity marketplace bounced around. It's up connected the quarter. That wasn't overmuch erstwhile you comparison it to the enslaved performance," helium said.

The 10-year output made an unusually volatile circular travel determination successful the 3rd quarter. It was 1.47% connected June 30, and it was arsenic precocious arsenic 1.46% Friday. In betwixt it dipped to 1.12% successful aboriginal August. Schumacher said the enslaved marketplace could beryllium quieter up of the 4th end, and the 10-year output could past resume its determination higher.

Some strategists ticker the 10-year Treasury output arsenic a starring indicator for stocks. It is besides linked to moves successful exertion and different high-growth stocks.

What's next

Katie Stockton, laminitis of Fairlead Strategies, said precocious maturation and tech are susceptible present to moves successful the 10-year Treasury yield. She said the exertion assemblage is the astir overbought successful comparative terms, erstwhile comparing the assemblage to the S&P 500. The S&P tech assemblage was up astir 0.8% for the week, and it was up astir 6% for the quarter.

"We would see reducing vulnerability to growthy ETFs similar ARKK and would beryllium respectful of immoderate breakdowns," said Stockton.

Investors person been fixated connected the S&P 500's 50-day moving average. For the archetypal clip this year, the scale broke beneath and closed nether the mean for aggregate sessions this past week. By Thursday, it regained the 50-day and finished supra it. The broad-market scale closed supra the 50-day moving mean connected Friday.

The 50-day is virtually the mean of the past 50 closing prices, and it is viewed arsenic an important momentum indicator, conscionable arsenic the 200-day moving mean is. A interruption supra could awesome a affirmative move, and a interruption beneath it could mean much downside.

Stockton said the alleviation rally successful the S&P 500 could resume successful the coming week. "But we deliberation it volition slice by the extremity of the week fixed the downturns successful our intermediate-term indicators. We expect the SPX to marque a little high," she wrote successful a note.

She expects the 10-year Treasury output could proceed higher. "Momentum appears to beryllium shifting to the upside and adjacent absorption is adjacent 1.53%. The breakout should payment the fiscal sector, which saw important outperformance [Thursday]," Stockton noted.

Week up calendar

Monday

Earnings: Aurora Cannabis

8:00 a.m. Chicago Fed President Charles Evans

8:30 a.m. Durable goods

12:50 p.m. Fed Governor Lael Brainard

Tuesday

Earnings: IHS Markit, Micron, Cal-Maine Foods, Thor Industries, United Natural Foods, FactSet

8:30 a.m. Advance economical indicators

9:00 a.m. Chicago Fed's Evans

9:00 a.m. S&P Case-Shiller location prices

9:00 a.m. FHFA location prices

10:00 a.m. Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen earlier Senate Banking, Housing and Urban Affairs Committee connected pandemic response

10:00 a.m. Consumer confidence

1:40 p.m. Fed Governor Michelle Bowman

3:00 p.m. Atlanta Fed President Raphael Bostic

7:00 p.m. St. Louis Fed President James Bullard

Wednesday

Earnings: Jabil, Cintas, Herman Miller

10:00 a.m. Pending location sales

11:45 a.m. Fed Chairman Powell connected European Central Bank panel

2:00 p.m. Atlanta Fed's Bostic

Thursday

Earnings: Jefferies Financial, CarMax, Bed Bath & Beyond, Paychex

8:30 a.m. Initial jobless claims

8:30 a.m. Real GDP Q2

9:45 a.m. Chicago PMI

10:00 a.m. Fed Chairman Powell and Treasury Secretary Yellen earlier House Financial Services Committee

11:00 p.m. Atlanta Fed's Bostic

11:30 p.m. Philadelphia Fed President Patrick Harker

12:05 p.m. St. Louis Fed's Bullard

12:30 p.m. Chicago Fed's Evans

Friday

Monthly conveyance sales

8:30 a.m. Personal income and spending

10:00 a.m. Manufacturing PMI

10:00 a.m. ISM manufacturing

10:00 a.m. Consumer sentiment

10:00 a.m. Construction spending

11:00 a.m. Philadelphia Fed's Harker