Volatility will be the name of the game on Wall Street in the week ahead as uncertainty over the euro-zone debt crisis remains and investors will need nerves of steel to make bets on risky assets like stocks.
The Standard & Poor’s 500 index’s drop this week of 10 percent from recent highs meant the benchmark index is now in a correction amid a rally that started on March 2009.
“This is a tough market. And if you don’t have a strong stomach and you are not one of those people who thrive on volatility ... this is not the time you should be trading,” said Randy Frederick, director of derivatives at the Schwab Center for Financial Research in Texas, Austin.
On Friday, stocks snapped a three-day losing streak as investors bought beaten-down shares including banks. But for the week, the Dow and the S&P were off around 4 percent and the NASDAQ fell 5 percent.
Analysts said economic data due this week and investors’ speculation that equities may have fallen too much could lead to a rebound in the market. But with the downside momentum strong on anxiety over European debt issues, the market can easily turn and create increased volatility.
On the week, the Chicago Board Options Exchange Volatility Index, Wall Street’s favorite yardstick of investor anxiety, rose 30 percent.
The measure of US stock market volatility closed at 40.10 on Friday, down 12.43 percent, after rising as high as 48.20, the highest since March 10 last year.
“Every bear market starts off as a correction so in this kind of environment, investors get anxious about whether this is just a correction or a start of the bear market. The unknown is what makes people uncomfortable, leading to bigger swings,” Frederick said.
The VIX 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 a protection on the underlying stocks.
US Treasury Secretary Timothy Geithner will make a stop in Britain and Germany this week to discuss troubled economic conditions there en route home from China.
“Of course, there is no quick fix to the debt crisis, but the visit is at a good time. We don’t know what will come out of the meetings, but it will probably be some sort of a coordinated effort to address the liquidity issue in Europe,” said Jeff Kleintop, chief market strategist at LPL Financial in Boston. “If it shows that the worst of the financial market pressure is starting to be relieved, it will not only be good for stocks but for all risky assets.”
Global markets across all assets have been pressured for for months on concerns that huge deficits in Greece will spread into a wave of debt crisis in the euro zone and eventually jeopardize the global financial system.
Fear that fiscal tightening would kill the economic recovery pummeled equity and commodity prices during the week and caused investors to pay up for safe-haven US government debt.
Investors will look for clues on the state of the US labor market when jobless claims data comes out on Thursday.
The number of US workers filing new applications for unemployment insurance unexpectedly rose on the week that ended on May 14, government data showed. The increase was the first time since early last month, dealing a blow to the labor market recovery.
“The improvements that we have seen in jobless claims have flattened out recently, especially after last week. This week’s data will be a major indicator of whether this is a temporary slump or a long-term decline,” Frederick said.
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