After recent turbulence, markets are likely to close out the final week of the third quarter with another bout of volatility.

Stocks traded in extremes during the week. Stocks plunged Monday morning due to concerns about financial contagion from Evergrande (a Chinese developer). Thursday saw the market surge higher, and losses were reversed. The S&P 500 and the Dow Jones Industrial Average were positive for the week, while the Nasdaq eked out a gain.

Chief investment strategist at CFRA Sam Stovall said, “I believe this market turmoil will continue.” It is performing as it usually does. This frustrates investors.

Three major stock indices also saw an increase in the third quarter.

According to strategists, the key development after wild stock swings as well the dramatic rise in Treasury yields later in the week is how the market will trade in the following week. On Wednesday, the 10-year was at 1.3%. It jumped to almost 1.46% on Friday.

The S&P 500 was down about 1.4% for the month of September so far. We are becoming too long. Technical indicators point to distribution. We are seeing breadth and prices increase, but we don’t see them moving over. Stovall stated that you are seeing the sentiment change. Stovall stated that the breadth of stocks needs to increase and that many are trading below their 200 day moving average.

October is a ‘seismic’ month

“I think October will be true to itself, which is a very volatile month. Stovall stated that October’s volatility was 36% more than the average for the 11 other months. The volatility is high and the number of corrections, pullbacks and bear market that occur in the month are higher. It’s a very seismic month.

Wellington Shields Wealth Management warns the market that stocks falling below the 200-day moving median is dangerous. The firm claims that only 59% (or less) of the stock exchanges in New York are still above this average, or continue to be uptrended. The 200-day average, or the mean of the closing prices of 200 stocks and indexes over the past 200 days, is a momentum indicator.

It is a rule that the 200-day average drops below 60% to above 80%, and it falls below 30%. While most stocks appear to be moving up, less than half are in an uptrend. Wellington wrote in a note that the market was only slightly below its highest levels, which is concerning.

What to watch

In the coming week, there are a few key economic reports including including durable goods Monday and ISM manufacturing Friday. Personal consumption expenditure data is available Friday. The Federal Reserve tracks inflation to monitor it.

The Federal Reserve will be the main focus of attention for the coming week. A host of Fed speakers will speak, including Fed Chairman Jerome Powell, who has testified twice in Congress about the pandemic as well as the response. Janet Yellen (Treasury Secretary) will accompany him on the Tuesday and Thursday hearings. Powell is also expected to appear with other leaders of central banks on Wednesday at the European Central Bank Panel.

Investors will also be watching Congress in the week ahead as it attempts to pass a funding plan in time to avert a government shutdown Oct. 1. The debt ceiling is expected to be part of that debate, but strategists do not expect it to be resolved at the same time. This could be a problem for markets for weeks, they say. Congress will have to raise the debt ceiling before the market can react.

Although they are unlikely to give any additional information, Fed speakers could refine their messages after this Wednesday’s signal from the central bank that it plans to start reducing its monthly bond purchases of $120 billion. A new Fed forecast on interest rates was also published by the Fed. It revealed that nearly half of 18 Fed officials anticipate raising interest rates in 2019.

Marc Chandler (chief market strategist, Bannockburn Global Forex) stated that the Fed’s achievements so far have been a “taper without a tantrum”.

He said, “I believe a lot people who invest on the market feel they’re skating on thin Ice and that any crack could prove to be big… People are sensitive and anxious because they know how stretched valuations are.” This means that we can expect volatility spikes and drops.

Chandler indicated that the market would need to absorb the moves made, including the increase in Treasury yields.

The new equilibrium is something we have to wait. Which market type should we anticipate? Is Trending the right word? Are we trying to identify a variety? He said. He said, “I believe we can find a range. There are some obstacles to overcome. Chandler mentioned that the October September jobs report will be a hurdle.

Except for shockingly poor employment data, the Fed may reduce its $120 million monthly bond purchases. Chandler stated that “that is all that is standing in the way” of Fed tapering.

Michael Schumacher from Wells Fargo said that the quarter’s end may be slow for big fund rebalancing. “The equity markets bounced around. The quarter ended up. He said that it wasn’t much compared to bond performance.

The third quarter saw a volatile round trip for the 10-year yield. The yield was 1.47 percent on June 30 and 1.46% on Friday. It dropped to 1.12% between June 30 and August. Schumacher stated that the market for bonds could become quieter before the quarter ends, which could mean the 10-year yield may resume moving higher.

Many strategists use the 10-year Treasury rate as an indicator for stocks. It can also be linked to movements in tech stocks and other high growth stocks.

What’s next

Katie Stockton, founder of Fairlead Strategies, said high growth and tech are susceptible now to moves in the 10-year Treasury yield. She said the technology sector is the most overbought in relative terms, when comparing the sector to the S&P 500. The S&P tech sector was up about 0.8% for the week, and it was up nearly 6% for the quarter.

“We would consider reducing exposure to growthy ETFs like ARKK and would be respectful of any breakdowns,” said Stockton.

Investors have been fixated on the S&P 500’s 50-day moving average. For the first time this year, the index broke below and closed under the average for multiple sessions this past week. It regained its 50-day moving average on Thursday and closed above it. On Friday, the broad-market index finished above its 50-day moving mean.

It is the 50-day average of closing prices and is considered an important indicator of momentum, much like the 200-day moving mean. If it breaks above, that could signify a positive trend. A break below this could be a signal of more downturn.

Stockton said the relief rally in the S&P 500 could resume in the coming week. We believe it will recede by the weekend, given the declines in intermediate-term indicators. In a note, she said that the SPX would make a lower peak.

The 10-year Treasury yield may continue to rise, she said. “Momentum seems to be shifting towards the upside. Next resistance is at 1.53%. The breakout should benefit the financial sector, which saw significant outperformance [Thursday],” Stockton noted.

Week ahead 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 economic indicators

9:00 a.m. Chicago Fed’s Evans

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

9:00 a.m. FHFA home prices

10:00 a.m. Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen before Senate Banking, Housing and Urban Affairs Committee on 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 home sales

11:45 a.m. Fed Chairman Powell on 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 before 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 vehicle 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