Explaining a Volatile Week in Stocks

So far, it looks like we're holding above 9,000 on the Dow today, although I'll be the first to admit it doesn't mean much before the closing bell given the huge swings we've been seeing this week, especially late in the day.

Witness Wednesday: Even after the Fed cut rates by a half-point, stocks sank in the final few minutes of trade after an erroneous report that General Electric would miss earnings.

A quick explanation from Barron's:

Wednesday's trading session featured a wild and wooly finish, as the Dow Jones Industrial Average plunged from a nearly 300-point advance in the final minutes of the trading session to a loss of 74 points—apparently fueled by a misspoken news item from Dow Jones Newswires in the final minutes of the session suggesting a new—and downbeat—earnings forecast from General Electric (GE). The report, leveraged off some comments GE chief executive Jeffrey Immelt made at a business conference in Spain, was repudiated by the company, and the newswire eventually reprinted a clarification. (The Dow Jones Newswire, like Barron's, is a product of News Corp.)

And what about Tuesday's 900-point gain in the Dow? Well, blogger Roger Nusbaum says the occasional big up day isn't exactly cause to cheer:

A reader left a comment that I think expressed surprise that the market was so quick to sell off yesterday at the close. Tuesday's 900 point Dow rally was not a sign of health. A healthy market does not deliver 10% in a day. The market could go up a couple of thousand points despite the current lack of health and even then the market would probably not be healthy. We all have opinions about what is probable here but we should not rule anything else out as possible.

I like this bit of analysis over at BloggingStocks by Joseph Lazzaro, who says, "Don't trust any Dow levels before 4 p.m.":

Recent market closes indicate: a battle
What are the Dow's recent daily closes telling us? Most of the market's technical indicators are bearish, but an equally important fact is that right now a battle is taking place between the bulls and the bears: the bears argue the worst economic news stemming from the financial crisis is yet to come; the bulls, that the worst news is behind us, and that stimulus—fiscal, monetary, and otherwise—will get the U.S. economy moving again. The Dow is currently around 9000, but the real battle is 8000: if the bears can break through that key support and push the Dow through 7800, then 7600 it will not be a pleasant time for investors. But if the bulls can hold 8,000, a bottom will be in place, setting the stage, potentially, for future gains.

To put it simply, stocks lurching wildly aren't a sign of market confidence. The better spots to watch are still in the credit markets, where things do appear to be getting a bit better, if only slowly. Today, Bloomberg says that the commercial paper markets are improving a bit. From that story:

U.S. commercial paper outstanding rose by $100.5 billion, or 6.9 percent, to a seasonally adjusted $1.55 trillion for the week ended Oct. 29, the Fed said today in Washington. It was the first gain in seven weeks, reversing a 20 percent decline during the previous six weeks. Financial paper led this week's gain, rising $69.4 billion, or 12.4 percent, to $628.8 billion.

"Confidence is coming back," said Peter Crane, president of Crane Data LLC, a money-market research firm based in Westborough, Mass. "Knowing the Fed will buy the longer term means companies will be able to refinance and take back their short-term paper if need be."

My take: Thawing credit markets are great, but stocks are still pausing before picking a real direction. Technical bottoms haven't been formed, and given an economy that contracted in the third quarter, there's still plenty of room to worry about both job creation and consumer spending. Aside from an end to the financial crisis, strength or weakness in those areas will determine which direction markets head next.