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Investors should get prepared for a wild week

Watch out for intraday swings because it's going to be wild.
/ Source: Reuters

Watch out for intraday swings because it's going to be wild.

Cataclysmic events including a nuclear disaster in Japan and the prospect of rising oil prices after military air strikes on Libya will keep investors reacting to headlines.

Western forces pounded Libya's air defenses and patrolled its skies Sunday, but their day-old intervention hit a diplomatic setback as the Arab League chief condemned the "bombardment of civilians."

"It's (developments in Libya) something that the market is paying a very close attention and not only will oil prices be in focus but the headline grabbing stories out of countries like Iran in the region will keep investors nervous as uncertainty grows," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

Many investors said the sudden increase in uncertainty had caused a corresponding rise in trading based on emotion rather than facts or fundamentals.

The volatilityWednesday caused the S&P 500 to erase its gains for the year and then rebound more than 1 percent Thursday.

Besides global developments this week, markets will get to respond to economic data on U.S. housing, gross domestic product and durable goods orders, but these may be relegated to second place behind traders' reaction to the latest headlines.

Wall Street ended higher on Friday, but indexes finished lower last week. The Dow ended down 1.5 percent, its biggest weekly decline since August. The S&P fell 1.9 percent and the Nasdaq lost 2.6 percent.

"The stock market broke down (last) week, violating support levels and generally turning the technical indicators bearish," Larry McMillan, president of McMillan Analysis Corp, said in a report.

The CBOE Volatility Index VIX , Wall Street's so-called fear gauge, shot up nearly 30 percent Wednesday when equities swooned after confusing statements from officials on the situation in Japan.

The gauge rose nearly 60 percent above its 50-day moving average, which has happened only a handful of times in the past 20 years.

Despite the 21 percent rise in the VIX for the week, traders bet the fear gauge would move higher. Call buying outpaced put buying Friday, with about 232,000 calls and 111,000 puts, although both were below their average daily volume, according to options analytics firm Trade Alert.

"While the VIX peaked in the 30 area around mid-week, we won't have confirmation that a top has been reached until we see a decline below these long-term trendlines and the 20 level," said Todd Salamone, senior vice president of research at Schaeffer's Investment Research in Cincinnati, Ohio.

The VIX settled at 24.44 Friday. The gauge, which often moves inversely to the S&P 500, measures the cost of hedges or protection investors are willing to pay against a fall in the S&P 500. The heavy call volume suggests expectations for more anxiety in the future.

"What makes this so difficult is that these issues are beyond the expertise of the market," said Russ Koesterich, an investment strategist at BlackRock Inc, which oversees $3.56 trillion.

"It's hard to say how severe the situation in Japan will get or how stable things will become in the Middle East, and that increases the downside risk."

The Japanese stock market has fallen 12 percent since a devastating earthquake and tsunami on March 11, and the average stock in Japan is selling now for 13.9 times its annual profit, said an article in the weekend edition of Barron's.

"Japanese stocks haven't been this cheap since the financial crisis," the article said, adding that stocks such as Sony, Canon, Toyota Motor and Nissan are among the most attractive now.

In latest news on Japan, the International Atomic Energy Agency said Sunday the radioactive contamination of some food near Japan's stricken nuclear plant has become a concern as authorities report progress in their battle to prevent a meltdown at the site.

Economic reports this week will include existing home sales and new home sales due on Monday and Wednesday, respectively. Durable good orders and jobless claims are due on Thursday and GDP is due on Friday.