Dhanvarsha: Wall St Week Ahead: Stocks seek direction after Fed, elections

Saturday, November 6, 2010

Wall St Week Ahead: Stocks seek direction after Fed, elections

Wall Street navigated through three major landmines this week -- the elections, the U.S. Federal Reserve meeting and jobs report -- with barely a scratch. Now what?

With earnings season winding down and a light economic calendar next week, the market will be left to its own devices to sort out its direction.

A rise of more than 16 percent in the S&P 500 .SPX since the start of September had many investors expecting a pullback after the trio of big events. But it appears to have emboldened them instead.

The CBOE Volatility Index, a measure of market anxiety, has slipped below 19 and the late-week action suggests a market getting ready for more gains -- not a sell-off.

"Some of the alternatives to stocks (bonds, cash, etc.) now look much less attractive, which should push money in the direction of stocks," said Bill Luby, a private investor in San Francisco, who writes the VIX and More blog. This will result in "reducing some of the downside risk for owning stocks, and also putting downward pressure on the VIX."

With the Fed supporting markets through quantitative easing, rates could remain low for quite some time. That, in turn, should help stimulate borrowing and make riskier assets more attractive. It could take data of a momentous nature -- something that suggests the economy is not responding to the Fed's plan to buy $600 billion in Treasuries -- to cause anything more than a minor slip-up in the market.

"What the Fed is doing is a consistent increase in money supply. Consistency will be much more important to the psyche of investors than big spikes," said Edward Hemmelgarn, chief investment officer of Shaker Investments in Cleveland.

http://www.reuters.com/article/idAFN059776720101105?rpc=44