The S&P 500 is down one percent for the week after being up four weeks in a row. So far, the declines we have seen this year have been on the order of three percent.» Read More
The Fed takes center stage Wednesday in a market that will see another deluge of earnings news.
Traders are also watching for more news on the Obama Administration's plans for the Troubled Asset Relief Program (TARP) and the proposal to develop a "bad bank" to hold toxic assets . CNBC's Steve Liesman clarified some aspects of that so-called "aggregator" bank in a report late Tuesday that said the plan is likely to be unveiled next week and could involve the purchase of common equities by the government.
Stocks Tuesday rose for a third day, with the financials up 3.5 percent. Financial stocks rose even more after hours on the CNBC report.
The Dow Tuesday rose 58 points to 8175, while the S&P 500 rose 9 points to 845.
"The market's acting fine with everything we've got going on," said Tim Smalls of Execution LLC. "What remains to be seen is what we'll see with the banks, what we'll see with the stimulus package."
The House of Representatives take up the $825 billion fiscal stimulus package Wednesday.
Smalls said the market showed some resilience when it rose off the 803 level on the S&P 500 last week. "Now we're trading 100 points above the low. That's not a bad little cushion. Are we out of the weeds? No. Are we going to test the lows? We may already have," he said.
"If we get through this week without a big sell off, or a big debacle, I'll take it."
Earnings reports Wednesday morning include AT&T, Boeing, ConocoPhillips, Wells Fargo, Hess, Baker Hughes, Wellpoint, General Dynamics, Legg Mason, Stanley Works and Southern Co. After the bell, Allstate, Murphy Oil, and Starbucks report.
In other corporate news, Bank of America holds a board meeting in Charlotte, N.C. The fate of CEO Ken Lewis is the topic of much speculation on Wall Street after the departure of Merrill Lynch CEO John Thain last week. Thain, who spoke to CNBC's Maria Bartiromo, denied that Merrill suprised Bank of America officials ahead of their merger with deeper losses and said they were made aware of what was going on at Merrill.
The Federal Open Market Committee is expected to release a statement Wednesday at 2:15 p.m., after its second day of meetings. However, there is little it can do in the way of rate cuts since it moved the Fed Funds target rate to a range of 0 to 0.25 percent at its last meeting.
Traders though say there could be some clarity from the Fed on some of its programs, including its plan to buy Treasurys.
Meanwhile, buyers jumped into Treasurys today as the government auctioned $40 billion in two-year notes. "We thought we'd get some cheap notes going into the FOMC. They actually came in pretty well. People had to cover shorts," said Michael Franzese, head of government trading at Standard Chartered.
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The yield on the 10-year fell to 2.519 percent and the two-year fell to 0.809 percent.
Oil took a deep dive Tuesday, losing $4.15 per barrel, or 9 percent to $41.58 on concerns about weak demand. EIA inventory data is released at 10:30 a.m.
Business and government leaders continue to meet Wednesday in Davos, Switzerland at the World Economic Forum .
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Now that there is a new Treasury Secretary in place, a revised plan for the financial bailout is expected and that could be a factor influencing markets in the next couple of days.
Timothy Geithner, former New York Fed President, was sworn in as Treasury Secretary Monday night, after winning approval from a Senate divided over issues with his personal income taxes. He was sworn in shortly after by President Barack Obama.
Geithner and the Obama Administration are expected to quickly redefine the Troubled Asset Relief Program (TARP) and the way the $350 billion in remaining funds will be distributed. The Obama Administration has said the money would be used to help consumers, not just inject capital into ailing financial institutions like the first batch of funding.
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Speculation also centers on the creation of a "bad bank" that would be created from the toxic assets sitting on bank balance sheets.
"The debate is pretty heated on it on whether to do the bad bank or not," said Diane Swonk, chief economist at Mesirow Financial. "The real concern is what kind of shenanigans are going to come through with the bad bank loans. I understand the concerns. I also have a hard time seeing how they can move forward without moving the bad stuff off the balance sheets."
Robert Harrington, head of equities trading at UBS, said investors have been waiting for clarity on the TARP and rules for financial firms. "You need some certainty one way or another. You need to see what the rules are. People are confused about the rules," he said.
The markets will also focus on the progress of the fiscal stimulus proposal. President Obama visits Capital Hill Tuesday to discuss the stimulus plan, in the face of Republican opposition. The $825 billion package comes before the House of Representative on Wednesday.
On Tuesday, S&P/Case-Shiller home price data is reported at 9 a.m., and consumer confidence is reported at 10 a.m. The Fed also begins its two-day meeting. Swonk said she hopes the Fed clarifies some of its programs, including what it intends with Treasurys and its plan to buy auto, credit card and student loan debt.
Harrington agrees and says that's what the market is waiting for. "I think the big thing with the Fed is what they are thinking on the Treasurys. The question is will they go in to buy the long-dated Treasurys to keep rates where they want them," said Harrington.
The New York Fed, meanwhile, is expected to name its replacement for Geithner Tuesday. CNBC's Steve Liesman reports that William Dudley is the likely choice. Dudley was chief economist at Goldman Sachs before joining the New York Fed in 2007 as head of markets.
More bad earnings news and dismal economic reports could steamroll stocks in the week ahead, but the market may gain some traction if it appears the Obama Administration is making progress with programs to help the economy.
The first look at fourth quarter GDP, which should show a severe contraction; new data on the real estate market, and a two-day Fed meeting are on the agenda in the week ahead, along with earnings from about a quarter of the S&P 500.
The House of Representatives is expected to take up the $825 billion fiscal stimulus program mid week, but the markets enter the week fixated on the idea that the Obama Administration could unveil a new financial rescue plan, using remaining funds from the Troubled Asset Relief Program (TARP).
The first half of the TARP has been used to inject capital into financial institutions, but there is a growing consensus that the second half could be used to form a "bad" bank, or aggregator bank to hold banks' toxic assets. Monday's Senate vote on Timothy Geithner's nomination as Treasury Secretary is also important, as it's the Treasury Secretary position that has orchestrated the financial markets rescue.
"As the crisis keeps unfolding, the bigger problem is businesses, that are viable, that need the money, aren't going to see any of it coming out of these banks." said Rick Schottenfeld, chairman of Schottenfeld Group.
"I do believe the Administration will bring with it another plan. We're at this inflection point where if something doesn't get done soon, the economy is going to worsen and we're going to see lows," Schottenfeld said on CNBC's "Closing Bell" Friday.
From 'Fast Money':
Stocks in the past week suffered from a rash of bad earnings news but more so from a major sell off and lack of confidence in financial stocks. The Standard and Poor's financial sector lost 7 percent in a week of wild trading.
"The days the financial sector gets obliterated are the days the market gets obliterated. The days when it catches its breath, the market comes back" said Bill Stone of PNC.
A new plan for "TARP is one of the most important things, so people can start making decisions," he said.Market Mayhem
The major indices, however, managed to hold key support levels, above the November lows. The Dow lost 2.5 percent for the week to 8077, and the S&P 500 closed off 2.1 percent, at 831. The Nasdaq was off 3.4 percent to 1477.
Traders are watching to see if these important levels will hold, but some technicians believe the lows could be broken. That would be 7552 on the Dow and 752 on the S&P. John Roque, of Nataxis Bleichrolder is one of those. He points to the Paris CAC and Italian MIB 30, two indices that have now made new lows. He said the world is no longer decoupled, and "If they've made new lows, I should pay attention." Roque said his S&P target is 680.
The dollar, meanwhile, marched higher against the euro and sterling, which hit lows not seen since the 1980s. The dollar was 2.3 percent higher against the euro, at $1.2985, and down 1.9 percent against the yen, in the past week.
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Brian Dolan, chief currency strategist at Forex.com, said he sees a scenario where the dollar might reverse course in the coming week. He said a weekend meeting called by President Barack Obama on the economy could result in some news on the TARP. "The risk now is things improve sentiment-wise. You get a rebound in stocks and fall off in the dollar," said Dolan.
"Something is clearly coming down the pike," said RBS Greenwich chief economist Stephen Stanley of the possibility of an announcement on TARP. "It feels like the Treasury, or Administration is going to take the lead on that. It kind of feels like at this point we're waiting for the Administration to decide what to propose," he said.
Stanley said though that he thinks the fiscal stimulus program, expected to reach the House floor this week, is not likely to do much for economy, and it could be a case of too much, too late. "Paint me one of those skeptics. I just don't think it's going to have a huge impact on the economy, partly in the way it's going to be structured. Most of what's in the package is not particularly stimulative for the economy. They are using it as a way to get a lot of stuff in that they wanted to get done, but couldn't because of the budget process," he said.
The stock market, easily swayed by earnings news, has its sights set on General Electric Friday. GE releases its earnings and plans a conference call with analysts ahead of the market open.
The GE earnings come a day after Microsoft took investors by surpriseby releasing a disappointing earnings report ahead of the opening bell, hours earlier than expected. Microsoft also said it was laying off 5,000 workers, an unusual move for the tech giant and one reason the company may have moved up the timing of its release. On top of the gloomy numbers and deep cost cutting, Microsoft said it will not provide forecasts for the rest of the year.
Microsoft's bad news came on the heels of weak earnings releases from Nokia and several financial companies. But it was Microsoft that really bit into market sentiment. The stock closed down nearly 12 percent, its lowest level in 10 years.
After the bell, Google showed just how mixed the tech picture has been this quarter . It joined Apple and IBM with better-than-expected results.
The wreck that was the banking sector this week actually made history.
According to Jeff Rubin of Birinyi Associates, bank stocks have fallen further and faster than at any time in history, including the Great Depression.
Rubin said on Tuesday, the day of their big sell off, bank stocks were down 78.51 percent from their February, 2007 high. At a parallel point in the 1930s (two years from their high), bank stocks were down 78.09 percent.
It's not a huge difference but ultimately, bank stocks lost a total 89 percent in the Depression era. It took them another nine months from the two-year mark to get there.
"I think the real point here is everyone is looking for a quick rebound in the financials. If you're looking for any guidance, the only guidance we have is the Great Depression. We went 20 years without a rebound. It was sideways until the 1950s, at least for the banks," he said.
Financials are now at an 18-year low in terms of weighting in the S&P 500. They are at 9.99 percent. Tech was in first place, with 16.1 percent and health care was a close second at 15.83.
Earnings news blew up what could have been a second up day for stocks, and it was Microsoft's surpise release of a worse than expected quarter that really sent stocks spinning.
Financials though continue to lead the decline, down about 6 percnet today, while tech is down 3.2 percent. Some of the worst performers are Huntington Bancshares, Fifth Third, Aflac, Citigroup, SLM and Bank of America..
Rubin shared this chart with us.
A wash of earnings news and weekly jobless claims will help decide the market's course Thursday, but there's a good chance there will be follow through to Wednesday's rally.
Stocks head into Thursday riding a tech bounce from Apple's earnings news and momentum from Wednesday. Plus, it is expected Tim Geithner will be confirmed as Treasury Secretary, a key position in the government's financial rescue operation.
Beaten down financial stocks led the market's rally Wednesday. The S&P financial sector recovered nearly 15 percent after Tuesday's pounding. Both Bank of America CEO Ken Lewis and J.P. Morgan CEO Jamie Dimon reported that they were buyers of their companies' shares. Earlier comments from PNC and good earnings from Northern Trust helped calm jitters around the group.
Art Cashin, director of floor operations at UBS, said Wednesday's rally may not be a one day wonder. "It can last a couple of days," he said. "But it's pretty much a Geithner-dodges-a-torpedo rally."
The ailing banking system is at the top of the Obama Administration's agenda Wednesday, after worries about the sector Tuesday handed the stock market its worse Inauguration Day losses ever.
Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.
Greenberg is senior stocks commentator for CNBC appearing throughout business day programming and on CNBC.com.
A CNBC reporter since 1990, Pisani reports on Wall Street and the stock market from the floor of the New York Stock Exchange. Follow him on Twitter @BobPisani.
Epperson covers the global energy, metals and commodities markets from the NY Mercantile Exchange for CNBC and CNBC.com.
Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.
Senior Editor at CNBC, commodity trader in a former life.
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