U.S. Markets Hit 5-Year Low on Monday then on Tuesday Stocks Zoom Higher out of the Gate!

Tuesday morning stocks roar higher out of the gate anticipating the Federal Reserve will cut interest rates at their two day meeting scheduled to begin today. Monday opened up with stock futures pointing downward but as the session moved on the Dow rebounded and climbed back several hundred points, then dropped again as the session drew to a close. The Dow fell 203.18, or 2.42 percent, to 8,175.77 after earlier rising by as many as 220 points. Even before the late-day selloff, it was an extremely volatile day for Wall Street — the Dow crossed between positive and negative territory around 60 times during the session. Today the Dow was up over 300 points in early trading and it now up around 55 points a little before noon on Tuesday.

It’s been a pretty crappy month for the stock markets so far — if the Dow finishes up the month at Monday’s closing levels, it would be the worst month since September 1931. The DOW is now 42.28 percent below its peak of 14,164.53, reached Oct. 9, 2007, and was at its lowest closing level since April 1, 2003 on Monday.

On Monday the Standard & Poor’s 500 index fell 27.85, or 3.18 percent, to 848.92, and the Nasdaq composite index fell 46.13, or 2.97 percent, to 1,505.90. The Russell 2000 index of small cap companies fell 22.72, or 4.82 percent, to 448.40.

Consumer Confidence Plunges to a Record Low

US consumer confidence plunged to a record low in October as a worsening financial crisis made Americans anxious about their jobs and pessimistic about the future, a report said Tuesday.

Earlier Tuesday, Standard & Poor’s said prices of U.S. single-family homes plunged a record 16.6 percent in August from a year earlier and plummeted more than 30 percent in Las Vegas and Phoenix.

The Conference Board said its index measuring consumer sentiment tumbled to 38.0 in October from an upwardly revised 61.4 in September. That was the lowest reading since the index began in 1967. The previous low was 43.2 in December 1974. The result was well below economists’ expectations for a reading of 52.0 and comes after a modest improvement in consumers’ mood the prior month.

New Home Sales Report

There was some positive news out early on Monday when a report was issued on new home sales. It showed a 2.7 percent rise from the 17-year low August new home sales numbers. The increase was above the consensus forecast but was still the worst September for new home sales numbers since 1981.

New home sales are still down 33% from a year ago in September 2007 as the industry tries to work off accumulating market inventory. Existing home inventory is starting to fall as consumers look for bargains but there were still an estimated 394K new single family homes on the market at the end of September. At current new home sales rates that would be around 10.4 months of inventory currently on the shelf but it is slowely being whittled away by bargain hunters, loosening credit, etc.

Builders have been reducing their production as sales have slowed but there is still a lot of inventory out there that needs to be chewed through before the housing market can start a slow and steady rebound. Right now home prices are still falling in many areas of the country.

While the new home sales numbers for September were encouraging, analysts caution that the numbers were compiled berfore the current financial crisis that got into full swing around the middle of September, and the numbers are compared to the August numbers which were arguably around the worst new hosting startup numbers on record, and while sales rose, housing prices continue to drop in many areas of the country.

Uncertainty about Recession

The up and down movement in the markets reflects the uncertainty about the markets and how long we might be mired in a recession. The volitility preceeds a two-day meeting by the Federal Reserve this week. Many investors expect the Federal Open Market Committee to reduce its target interest rate 50 basis points to 1%. Such a move would signal interest in providing the markets with capital to alleviate the ongoing credit crisis. Investors are also optimistic that the European Central Bank will also move on rate cuts of its own.

The market was thrown into a funky mood on Monday after credit ratings agency Moody’s Investors Service in the last half-hour of trading Monday downgraded General Motors Corp. further into “junk” status, pointing to the sharp contraction of the U.S. auto market. Shares of GM, one of the 30 Dow components, sank 50 cents, or 8.4 percent, to $5.45. GM rebounded up $.50 per share on Tuesday to $5.95.

Earlier, banks got a boost after the Treasury said it signed agreements with nine financial institutions to buy stock in the companies this week to help them weather their own financial difficulties. The proceeds from the stock sales are intended to bolster the banks’ balance sheets so they will begin more normal lending practices again.

Earnings Reports

BP, Europe’s second-largest oil company, reported third-quarter earnings that increased 83% on high oil and natural gas prices.

Occidental Petroleum (OXY), another oil company also reported a rise in earnings. Net income rose to $2.27 billion, or $2.78 a share, in the third quarter from $1.32 billion, or $1.58 a share a year earlier. Net sales in the quarter rose to $7.1 billion from $4.8 billion. Production in the quarter rose 3%.

Ashland (ASH) reported a loss in the fourth quarter as costs for raw materials rose. The company reported a loss of $10 million, or 15 cents a share, compared with year-earlier net income of $32 million, or 51 cents a share. On a continuing operations basis, the loss in the latest fourth quarter was $1 million, or 1 cent a share. Analysts expected earnings of 30 cents a share in the quarter.

German software firm SAP (SAP) said its third-quarter profit slipped 5% and said it would not issue a revenue forecast for the remainder of this year.

Humana (HUM) reported a third-quarter earnings decline from the same period a year earlier, partly due to losses in the company’s investment and securities lending portfolios. Humana cut its forecast for the current fiscal year. The company earned $1.09 a share in the quarter, compared with $1.78 a share for the same period a year earlier. The latest quarter included 40 cents a share in losses, associated with impairments in Humana’s portfolios and sales of securities issued by distressed financial institutions.

U.S. Steel (X) also announced an encouraging third quarter, saying profit more than tripled, but at the same time softened its guidance for the fourth quarter.

Where Do We Go From Here?

With investors uncertain about the economy, the market appears to be bouncing along a rocky bottom after falling sharply earlier this month. There is no data yet to support the claim that we have bottomed out and are ready to rebound significantly. The overall market volitility index is still very high and markets are grappling with new data coming out each day.

We could hit a bottom any day or we could be heading from here down to the 2002 market lows having reached the 2003 market lows yesterday. Keep your seat belts fastened we are still in for more turbulance I believe.