Wells Fargo is the first of the major banks to report earnings Friday morning, and traders say Wells needs to make its numbers or the market could get spooked before both the weekend and next week's heavy calendar of financial earnings. Wells is not expected to post a big decline like J.P. Morgan, Citigroup and Bank of America, which are expected to show steep earnings declines.
"That's the one everybody's hanging their hat on. It's going to be the outperformer," said one trader.
Stocks sold off Thursday in one of the most turbulent sessions in two months on concerns about the global economy. Global markets began reacting overnight to a string of weaker data and on reports of trouble at a Portuguese financial institution.
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The Dow was down 180 points at the open Thursday, but recovered to close just 70 points lower at 16,915 in its biggest one-day reversal in 13 months. The S&P 500 ended the day down 8 at 1964. But the Russell 2000 was off more than 1 percent at 1161, giving it a decline of 3.8 percent so far for the week and potentially its worst weekly decline in two years.
Steve Massocca of Wedbush Securities said the selling may not carry through. "We're technically in need of a correction. Fundamentally, we're in a need of a correction. The one thing giving me pause is the reason we got a sell off today wasn't really that negative. If it was something that had a little more meat in here, I'd say absolutely," he said.
High valuations in momentum names, and small caps could continue to be a concern, he said. "Stocks are expensive. It doesn't take much to cause issues," he said. "I would not say they are overpriced but they (aren't) cheap and some stocks are stupid expensive. These patches of overvaluation are a concern." He pointed to momentum names like Tesla, Baidu, and Amazon.
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Credit Suisse strategist Lori Calvasina says more pain could be ahead in the small cap universe, which is priced at 18 to 19 times forward earnings. "We have not at any time this year made any significant dent in the overvaluation problem we came into 2014 with…I think it will be resolved by year end," she said.