The relentless ramp up of oil and commodities prices could be over for now, and that ultimately would be a good thing for stocks, says Citigroup Chief U.S. Strategist Tobias Levkovich.

"Is this the beginning of the unwind? My sense is yes," he said in a phone interview.

"There've been false dawns before, but structurally it should be."

Levkovich has been expecting this turn in the markets to come at mid-year for some time. "It's when you start to see the real weakness in the industrial environment," he said. One sign, he said, is deterioration in Europe, evidenced this week with the poor reading on German business confidence. He made these comments to me yesterday before oil fell through $134. (It finished today under $130 per barrel on the NYMEX)

"We've been saying it would start to shift mid-year..The investor would start to see the problems in the industrial commodities energy trade," he said.

Levkovich said it would not be a positive if the reason for energy's decline is global economic weakness. He also said there will be impact from the unwind of the equities related energy and commodities trades which he describes as "overcrowded."

"Ultimately, it should be good. It may not be good day one. because people have to take down earnings numbers and they have to react to that news," he said.

Levkovich has been favoring financials and certain consumer discretionary shares. He also likes health care and telecom services. Last month, he told me that health care stocks were like something you stored in the back of your attic, ignored and I would say, dusty. But since then, they've outperformed the market, rising more than 4 percent in the last month.

In a note today, he said equities are caught in a vacuum where the market had been suggesting that there was no value in many of the "franchise financial or consumer names." (those financials are certainly on fire today - up another 6.4 percent) Helped by JP Morgan'searnings, the group is in the second day of a major rally. Some of the most beaten up names - Lehmanand Washington Mutual- are scoring double digit gains.

"Financials are needed for the broad market to catch a real bid. It seems difficult to imagine that equity markets will trade higher without participation of the financial names, given the close connection between capital markets and capital market-sensitive stocks," he wrote in a note released this morning.

Questions? Comments? marketinsider@cnbc.com

Earnings from J.P. Morgan and some other big companies could sway the market's early direction, but traders are closely watching oil to see if it will make or break the upswing in stocks.

J.P. Morgan's earnings are expected before the bell, and Merrill Lynch's results come after the close. The financials Wednesday scored huge gains on the back of Wells Fargo's solid earnings report and dividend increase, but it was the move in oil that got the most credit for propelling equities.

Oil slumped $4.14 or 3 percent per barrel to $134.60, giving it a two day decline of more than 7 percent. That move helped ignite a stock rally that took the Dow up 276 points or 2.5 percent to 11,239 and the S&P 500 jumped 30 or 2.5 percent to 1245.

Oil Slick

The big debate on the street is whether this decline is a real reversal or just another trading event, like last week's drop in oil.

"The fact that it nearly reached $150 was part of its undoing," said CNBC's Rick Santelli. "Other factors are pressuring it, including options expirations Thursday and futures expirations next week."

Santelli said a psychological factor was President Bush's elimination of an executive ban on offshore drilling earlier this week, even though it does not yet change the status quo and would take years for results.

Santelli says he does not necessarily see this move down as a turning point. "You can't undo five years in two days," he said of the momentum in energy markets.

Econorama

Housing starts are reported at 8:30 a.m., and weekly jobless claims are reported at 8:30 a.m. The Philadelphia Fed survey is reported at 10 a.m.

Earnings Central

Thursday is a major earnings day. Coca-Cola, Nokia, BlackRock and United Technologies report before the bell, along with dozens of other companies. In the after hours, we'll hear from big tech - Google, Microsoft and IBM.

Oil's move could be a key trend in Wednesday's markets, as traders watch more Fed testimony, a bunch of earnings reports and another helping of inflation data.

It wasn't just the financials that got fried in Tuesday's market. Energy shares felt the heat - falling 4.2 percent as crude oil took a dive on the NYMEX. Oil was down $6.44 per barrel at $138.74, a decline of 4.4 percent, its biggest decline since March 19. It was the biggest dollar decline in oil since 1991.Oil inventory data is due at 10:30 a.m. Wednesday and could add to volatile trading.

Fed Chairman Ben Bernanke appears Wednesday for a second day of his semiannual testimony before Congress. The hearing before the House Finance Committee starts at 10 a.m.

Key economic news Wednesday includes consumer inflation data (CPI), reported at 8:30 a.m. and minutes from the last FOMC meeting, released at 2 p.m.

Other data includes industrial production, due at 9:15 a.m. Treasury international capital flow data is released at 9 a.m. and the National Association of Home Builders survey is reported at 1 p.m.

An important earnings report to watch before the bell is Wells Fargo. It's one of the first of several major banks to report this week.

Another important report came after the bell Tuesday. Intel reported better than expected earnings after the bell, but it gave up most early post market gains. Intel reported profits of $1.6 billion on revenues of $9.47 billion and said demand remains strong for its microprocessors and chipset products.

Market Mayhem

The Dow lost 92.65 percent, or 0.8 percent Tuesday to 10,962, and the S&P 500 fell 13, or 1.1 percent to 1214.91. Encouraging to traders though is the pickup in volume. The NYSE saw its second largest volume day in history, with 7.28 billion shares trading. Average daily volume this year has been 4.33 billion. Traders have been saying big volume has to come with a big sell off in order for the market to bottom out.

As "Fast Money" pointed out in Tuesday's show, Wednesday is the nine-year anniversary of the stock market's first close above Dow 11,000 - July, 16, 1999. Ironically, the market closed below 11,000 Tuesday for the first time since July 21, 2006, a full circle.

Another interesting market fact came from Standard and Poor's. For the first time since 1992, the S&P health care group closed with a higher market value than the financials. Financials have now lost 51.8 percent since October, 2007 and have fallen from the largest sector to the fourth largest. Meanwhile, health care stocks have been acting healthier lately. Not surprising, they were the best performers Tuesday, up 1.3 percent.

The S&P financial sector was down 3 percent, unable to hold onto gains. Fannie Mae and Freddie Mac were again both down, as Congressional testimony from Bernanke and Treasury Secretary Hank Paulson did little to reassure equity holders of those companies. Debt of the two-government sponsored entities however has been performing well as bondholders have been reassured by the government's actions this week.

The dollar recovered some ground against the Euro Tuesday after hitting a new low in overnight trading. In late afternoon trading Tuesday, the dollar was at its lowest point against the yen since June on concerns about the financial sector.

Buyers in Treasurys, meanwhile, helped push the yield on the 10-year to 3.844 percent and the two-year to 2.39 percent.

Indy Mac Attack

Greg Peters, Morgan Stanley Credit Strategist, said it's been the Indy Mac Bank news this week that's trumped Freddie Mac and Fannie Mae for the markets. (Bank stocks certainly continued to register a high degree of fear and uncertainty Tuesday, with Wachovia, Bank of America and Wells Fargo all joining the parade lower.)

As the dollar trades near an all time low against the euro, the question is whether Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson can talk tough enough to pump up the sagging greenback.

Bernanke and Paulson speak before the Senate Banking Committee this morning in a hearing that could stretch into the afternoon. Bernanke's testimony is initially his long scheduled semi annual testimony on the economy. Paulson was to join him and the focus turns to the Treasury and Fed plans to backstop Fannie Mae and Freddie Mac and no doubt the health of the financial system.

Bernanke's prepared remarks were released ahead of his appearance. He said the Fed is concerned about economic growth and the risks of inflation have intensified. His comments knocked more wind out of the stock market and weighed on the dollar. Paulson speaks later and they both take questions.

"If they say the same thing they always say, it's going to be ugly for the dollar. If they stick with the strong dollar mantra, the dollar's going to take another swoon," said Brian Dolan, chief strategist at Forex.com.

The dollar initially strengthened on Sunday's news of the Treasury plan, but as markets around the world start to reflect skittishness among foreign investors, the dollar has slid. Overnight, the euro shot above $160.39, a new high.

"These guys are all in a position to console and stabilize the market. I expect a little bit of cheerleading," said Dolan. But he said what the markets really want to hear is that U.S. officials are willing to use more than just words to defend the currency, and that they are ready to take action. Paulson and Bernanke also need to tell markets that fears around the financial sector are over blown and that the dollar should not be trading lower.

"All they need to do is change a little bit of the language and the market will maybe see a change in the risk calculus," he said.

"Since the whole credit crisis began, this is the most heightened chance of intervention we've had," said Dolan. Bernanke and Paulson will attempt to get support for the plans to backstop Freddie and Fannie, which needs Congressional approval.

But their words are aimed just as much at the international arena. "They are talking very much to an international audience. They're also getting pressure from various foreign governments to prevent the dollar from falling further," Dolan said. He also said they will want to stop the "runaway train" of a falling dollar, which is contributing to rising oil and other commodities prices.

Boris Schlossberg, senior currency strategist at DailyFx.com, told us in a note yesterday that the fading dollar gave way to the euro as the safe haven trade in the currency markets once more. "Since the greenback can't seem to get out of its own way, battered by systemic risk and anemic growth, the only way to strengthen it appears to be through intervention," Schlossberg wrote. (note to readers: includes fix to Schlossberg's title)

But he also notes that intervention doesn't always work and it has to be a major effort by the G-3 rather than by one Central Bank. He said the Plaza accord worked in the 1980s because central banks coordinated to drive the dollar down. "I t think it is much easier to knock down a strong currency rather than prop up a weak one. It becomes a matter of psychology. Once the public doesn't like the product, you can't sell it at any price," Schlossberg writes.

"If EURUSD passes beyond 1.65, watch the intervention chatter really pick up. Having run out of policy choices this may be the only card left for U.S. authorities to play," he says. Questions? Comments? marketinsider@cnbc.com

Fed Chairman Ben Bernanke's testimony before a Senate committee takes on even greater importance for Tuesday's markets, now that the Fed and Treasury have promised to backstop mortgage giants Fannie Mae and Freddie Mac.

There's plenty of other news to watch, including producer price inflation data, retail sales and some key earnings from financial institutions and blue chip Johnson and Johnson. General Motors also has a before the bell announcement on its plans to reshape itself. Intel reports after the bell.

Fed Speak and More

Bernanke has been scheduled to give his semiannual testimony on the economy before the Senate Banking Committee Tuesday morning, but he will now be joined by Treasury Secretary Hank Paulson and SEC Chairman Christopher Cox after his initial testimony.

All three are expected to answer questions about the Fed and Treasury plans to make sure Freddie and Fannie are well capitalized. Bernanke gives the Fed's latest economic forecast at the beginning of the 10 a.m. hearing, before moving on to Freddie and Fannie.

"We may learn a little more about the motivation for the move -- how severe the situation is for Fannie and Freddie," said Mark Zandi, chief economist at Moody's Economy.com. "I'm really curious to see how Congress will react to this."

"I think the bond holders are okay with it. They are convinced they are going to be fine, but the stock holders are very nervous about what it all means and how diluted it will be," he said.

Bernanke is also scheduled to spend Wednesday morning giving his economic testimony before the House Financial Services Committee.

Econorama

There are several key events on the economic calendar. The Producer Price Index, an important inflation gauge, is reported at 8:30 a.m. and retail sales for June are at 8:30 a.m. The Empire State survey is reported at 8:30 a.m. and business inventories are at 10 a.m. San Francisco Fed President Janet Yellen speaks on stabilizing communities at 3:30 p.m.

Blood on the Street

What started Monday as a halfway decent morning for financial stocks turned quickly into a blood letting with the KBW banking index diving 8.5 percent, the worst one day decline in its 16 year history. Downgrades, earnings reductions and speculation surrounded the group, taking on a more dire feel after the federal takeover of Indy Mac Bank Friday.

"What's going on is people are worried about the regional banks. You've had a couple of brokers talk about whether they can sustain the dividends. One of the interesting things is the preferreds are selling off sharply," said Art Cashin, UBS director of floor operations.

The stocks of Fannie Mae and Freddie Mac both jumped in an early relief rally but moved lower, each finishing with a loss on the day. Freddie successfully floated $3 billion in securities, a relief to the credit markets.

"What is really stunning about this ... is the Treasury threw the full faith and credit of the U.S. government behind those two stocks, and the stock market yawned. That's a little wary," he said.

The major stock indices did not show the ravaging felt in the financials. The Dow was off 45 at 11,055, and the S&P was off 11 at 1228. But the S&P financials were down 5 percent.

Among the worst hit bank stocks was Washington Mutual , down nearly 35 percent on the day. But Washington Mutual said after the bell it had sufficient capital, reversing its stock decline. Earlier in the day, Lehman said WaMu will need to add to reserves in the second quarter and over the balance of the year from some $26 billion in losses on its balance sheet. National City, which defended its capital position during the trading day, was down 14 percent at the close after a much steeper decline earlier.

Goldman put Zion on its conviction sell list, slicing the target to $21 from $39. That stock lost 23 percent.

Worries that other banks could fail surrounded the sector. The FDIC's Sheila Bair appeared on "Closing Bell," and said her agency has 90 troubled banks on its watch list. IndyMac was put on that list in June, she said.

"I think there's going to be other institutions that are in trouble, and I don't think the Fed and Treasury are going to be there to help," said Zandi. He said he expects the FDIC to handle them unless there are too many big failures.

I asked Zandi about his expectations for a rebound in the weak housing market, which acts to reinforce the deterioration in mortgages. "I was more hopeful before Fannie and Freddie, and everybody was hoping for them to provide more credit, not less," he said. "There's just so much foreclosed property and there's just no credit."

Zandi said this negative feed back loop is self-reinforcing, and he expects there will not be a recovery in housing prices until late next year.

Stocks to Watch

General Motors says it will brief employees at 8:30 a.m. and then hold a 9 a.m. press conference on how it plans to "align the business to current market conditions."

Genentech reported earnings after the bell, and its stock rose after it raised its earnings forecast for 2008.

It didn't take long for investors to cash out of the stock market's early gains today, and the question is how will the day progress.

Traders say it's a basic "sell the rally" reaction. We watched as the financials turned south, after seeing buying interest out of the gate this morning. Financials are now the worst performers on the day.

Freddie Macand Fannie Maeboth lost their some gains, dipping into negative territory temporarily and stocks like Wachovia, Lehmanand Merrill are under pressure. At the same time, the dollar erased some gains and oil is starting to perk higher.

Earlier this morning, Jeff Rubin of Birinyi sent out a note pointing out that the morning of the Bear Stearns rescue, futures were quoted down 28 points ahead of the open, but the market worked its way higher throughout the day. Today, futures pointed higher and the market already has since lost some steam.

Traders were encouraged by moves this weekend by the Treasury and Fed to shore up confidence in Fannie and Freddie. "It's going to help but it's not going to solve anything," said Tim Smalls, head of U.S. trading at Execution LLC said.

Traders were watching the auction of $3 billion in Freddie securities. "Results were strong. The government stepping up in front of the auction helped investor confidence," said CNBC's Rick Santelli, from the Chicago futures pits.

As for the stock market, "We're up in the morning. The market is really not able to hold gains. Sell into the rally," said one trader who also said huge short positions in Fannie and Freddie were adding to volatility.

Questions? Comments? marketinsider@cnbc.com

Expect heavy turbulence in the week ahead.

Analysts say hurdles for the stock market in the coming week include continued uncertainty about financial sector—specifically mortgage giants Fannie Mae and Freddie Mac —as well as the unrelenting pressure of rising oil prices.

But U.S. officials took some of the anxiety out of the market Sunday evening when the Treasury and Fed said they would back stop Fannie and Freddie and allow them to tap the Fed's discount window if necessary . The focus is now on how Freddie will fare with a $3 billion securities offer Monday, the first such auction since the announcement and an event Wall Street will be watching.

Traders and analysts had speculated Friday that the government would make an announcement Sunday to show support for the two institutions and soothe worried financial markets ahead of the Asian market open.

U.S. bank regulators Sunday also moved to reassure IndyMac Bank depositors that they are in control of the troubled institution, which was seized by regulators Friday. IndyMac Bank was an aggressive mortgage lender and once had $32 billion in assets.

A boost for stocks may also come from InBev's frothy $50 billion offer for Anheuser-Busch , which the company's board was set to accept Sunday night at a meeting in St. Louis.

There is a heavy calendar of economic data, corporate earnings reports, plus two days of testimony on the economy from Fed Chairman Ben Bernanke.

"The financials are going to have a tough go of it next week," said Jefferies and Co. Chief Strategist Art Hogan. In addition to the swirl of speculation that has driven Fannie and Freddie shares lower and lower, major banks are reporting results and are expected to unveil more write downs.

Also worrying Wall Street is Lehman Brothers stock, which has been spiraling downward on credit worries. "A resolution (for Fannie and Freddie) would help. Whether it's a government take out or a back stop committing access to capital," said Hogan.

James Paulsen, chief investment strategist at Wells Capital Management said oil will be a concern for stocks in the coming week but Freddie and Fannie could be more worrisome. "The meltdown of Freddie and Fannie (stocks) will not reduce the ability of what they can do," but the market remains fearful, he said.

The Dow lost 1.7 percent, falling to 11,100 in the past week. For the first time in two years, it dipped below the key 11,000 level. The Nasdaq lost just 0.3 percent for the week and the S&P was down 1.9 percent, finishing at 1239. The financial sector declined 6.3 percent for the week, followed by consumer discretionary with a 4 percent loss. The winner was the S&P healthcare sector, up 1.3 percent.

"We'll have a plethora of economic data but none of it will take away from the earnings data," said Hogan.

Hogan said most earnings will be routine, like those from General Electric Friday which was in line with expectations. Yet, "I think we could get some upside surprises because we've priced in worst case scenario in a lot of areas," he said.

Econorama

There's a real cross section of data in the week ahead that will show how the consumer, housing and manufacturing segments of the economy are faring and just how hot inflation has become.

A big event will be the two days of testimony from Bernanke. He gives his semiannual testimony on the economy before the Senate Banking Committee on Tuesday and then appears before the House Financial Services Committee Wednesday. Bernanke will include in his testimony the latest quarterly economic projections from Fed governors and bank presidents.

"I don't find him capable of saying anything that's going to take us by surprise," said Hogan. He said Bernanke is not likely to change his economic view and his testimony is likely to probably mirror comments he made before the House Finance Committee Thursday where he was discussing regulation of the financial system.

The Fed also releases the minutes of the last FOMC meeting Wednesday at 2 p.m. The economic projections that are usually released with the minutes will be issued the day before with Bernanke's testimony.

On Tuesday, retail sales for June are reported. On the same day, the Empire State survey is reported and producer prices for June are released. Consumer inflation data, CPI is reported Wednesday morning, as is industrial production. The Treasurys international capital flow data is issued Wednesday morning. The National Association of Home Builders survey is released Wednesday afternoon.

On Thursday there are weekly jobless claims, housing starts and the Philadelphia Fed survey for July.

Wells Capital's Paulsen says the jobs data could be the most important number of the week and may not be as weak as expected. "Given the strong signs of flattening, those could be big," he said.

Paulsen said recent data has been better than expected, including Friday's trade numbers but the market is ignoring it. "It isn't the economy, it's the sentiment," he said.

He said after periods of very bad sentiment, there are often big opportunities. "I have to worry stocks go lower for the next three months," he said. But he is still a buyer with a long-term horizon. He said two years from now, returns on investments made now will look good.

"It's a highly volatile market. It is not investor risk. That's trader risk," he said.

Earnings Central

The trickle of earnings reports we've been seeing will turn into a deluge by the middle of the week.

Financials, industrials, technology and health care companies report.

Among the financials Charles Schwab, State Street and US Bancorp report Tuesday. Northern Trust and Wells Fargo report Wednesday. BlackRock, JPMorgan Chase, Merrill Lynch, PNC, Bank of New York Mellon and CIT Group report Thursday. On Friday, Citigroup reports.

Wall Street's bears roared back Wednesday, and stocks will have to face down tepid chain store sales and testimony from Fed Chairman Ben Bernanke in Thursday's session.

Wednesday was more violent on the downside than Tuesday was on the upside. This time, the S&P 500 joined the Nasdaq and Dow, closing in bear market territory for the first time in this rout. The Dow lost 2.1 percent to 11,147 and the S&P fell 2.3 percent to 1244.

Like most terrible days in this market, the financials were right there at the heart of the selling and fear mongering. Traders say there is lingering concern Fannie Mae and Freddie Mac will be looking to raise billions of dollars in new capital, even after James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said Tuesday the firms are adequately capitalized.

The S&P financial sector was down 5.2 percent, its worst performance since July, 2002. Brokerage stocks had their worst day since March 17, when Bear Stearns was bailed out.

Freddie Mac fell 23 percent and Fannie Mae fell 13 percent. Bloomberg reported that Fannie paid a record yield over benchmark rates on $3 billion of two-year notes. It reported the 3.25 percent benchmark notes priced to yield 3.27, or 74 basis points more than comparable Treasuries.

Lehman, a perennial rumor target, fell 11 percent. Wachovia was off 8 percent. The bank named Treasury Undersecretary Robert Steel as its new CEO. Bank of America was also lower but its stock was helped after the close by comments from CEO Ken Lewis, who said he didn't see a need to cut the dividend or raise new capital.

Thursday's Agenda

Testimony from Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson before the House Financial Services committee Thursday will certainly get attention. They are expected to discuss how to improve the regulatory structure and avoid future events like the collapse of Bear Stearns. We heard some of that when they spoke to the FDIC forum Tuesday.

Weekly jobless claims are reported at 8:30 a.m., and natural gas inventories are reported at 10:35 a.m.

San Francisco Fed President Janet Yellen speaks at 3:30 p.m. in Oregon. Fed speakers are being watched closely. Late Wednesday, Kansas City Fed President Thomas Hoenig said the Fed should raise rates "as quickly as possible" to get back to a neutral in order to fight inflation, according to Reuters.

Oil's Spill

Oil failed to regain much traction Wednesday even with news of an Iranian missile test. it ended the day at $136.05, up just one cent barrel. Gold rose $5.40 per troy ounce, or 0.6 percent to $927.30.

John O'Donoghue of Cowen and Co said some of the talk on the street is that select stocks are being sold off because of fund redemptions. "Then there's the continued great unwind of the financials," he said.

O'Donoghue, who heads equities trading, said he looked back at the last bear market -- from August 2000 to March 2003. "The S&P was down 49 percent in that period of time. It was quite ugly and nasty. You had the tech blow up. You had 9/11. You had Worldcom. You had Sarbanes Oxley and the Gulf War," he said. But there were also six bear market rallies during that period of time.

He said he will be watching the chain stores sales Thursday and they should be pretty lousy. "There's a different dynamic that's going on within the whole retail sector and that's the migration to downscale," he said. He said Wal-mart has been seeing a different demographic of more well heeled shoppers in its stores and McDonald's has been seeing traffic from other restaurants for consumers seeking cheaper meals.

O'Donoghue says he expects to continue to see relief rallies which can be played by the opportunistic, but "it's going to be rough sledding for awhile.

Questions? Comments? marketinsider@cnbc.com

Ramius Capital's Peter Cohen says Wall Street is going "back to the future" and after the dust settles on the credit crises, the big firms could ultimately look more like they did in the 1980s.

"We're going to look like we did in the mid '80s with manageable balance sheets. You'll know all the risk on the balance sheets," he said.

Wall Street firms have been deleveraging as they make their way through the credit crunch. Cohen once was ceo of Shearson Lehman, and I thought he might have interesting insight into how the firms might evolve. He does not see a wave of mergers for the securities firms but there may again be investors willing to put capital up if the price is right. "The problem is everybody who stepped up is under water," he said.

"If you could, you'd merge Lehman into someone but the problem is everybody has everything," he said in a quick interview after his appearance on "Squawk Box." (see clip below.)

Cohen reminisced a bit about how Wall Street used to have dozens of firms. When he was with Shearson, the firm bought 40 different firms between 1971 and 1988. Shearson merged with Smith Barney and is now part of Citigroup .

He said he does expect mergers of regional banks and even major banks. I asked him about Citigroup and whether its new ceo Vikram Pandit will turn the tide there. "What happens to it? I think anything. The question is whether the markets will give the firms time," he said.

As for the stock market, I asked Cohen whether he sees a bottoming out as some traders believe. But he offered no cheer on that front.

"I think the worst is yet to come. I think we've got a tough year, year and a half to get through. Things aren't getting any better in the financial system. They're getting worse," he said. He said a friend who is ceo of a major home builder tells him things are still deteriorating, and he doesn't yet see a bottoming in housing.

Cohen founded Ramius Capital Group in 1994. It is a global alternative investment firm with $11 billion in assets.

The debate about whether stocks are finding a floor is gaining momentum, but traders agree it's the earnings season that will help decide the details.

Stocks head into Wednesday buoyed by Tuesday's weaker oil prices. Therefore, the 10:35 a.m. weekly oil inventory report is even more important than usual.

The Dow may also get a lift from the afterglow of Alcoa's better-than-expected profit report. As the first big Dow component to report, Alcoa kicked off the earnings reporting season with a positive.

The aluminum maker beat some analysts' estimates and in the after hours session reversed the decline in its stock, positioning itself for a move up in Wednesday trading. Alcoa was more than 5 percent higher than Tuesday's close. It earned $546 million, down from $715 million in the quarter last year but it also said it was able to raise prices due to greater demand.

Shorter Hair on the Bear

Tuesday's rally took hold late in a mostly wishy-washy session where commodities fell and the dollar rose. By the close, the Dow and Nasdaq were both out of bear market territory. The Dow swept 152 points higher, or 1.4 percent to 11,384. The S&P 500 was up 21 or 1.7 percent at 1273.70, its best performance in more than two months, and the Nasdaq jumped 51 or 2.3 percent to 2294. The S&P only reached bear market territory on an intraday basis.

Stocks that advanced Tuesday included consumer staples, airlines, drugs, and the financials. The losers were energy and materials which sold off with commodities. Fed Chairman Ben Bernanke gave support to the financials with his comments that the Fed should leave the lending window open to Wall Street firms.

The AMEX Pharmaceutical Index was up 3.4 percent, its best day since April, 2004. You have not been imagining it. There's been a lot of talk about how its time to dip into health care. Health care, in fact, was the best performing S&P sector, up 2.9 percent. Among the best performers in that group were Abbott Labs, Genzyme, Mylan, Forest Labs, followed by big pharma stocks, like Bristol-Myers, Lilly, Schering Plough and Pfizer.

"It's all oil driven. Everybody's watching what's going on with that. The dollar's making a move to the upside and that's a good thing. A lot of what we're looking at here is earnings season," said Peter Costa of Eckhart and Co.

Costa says it feels like the market is bottoming. "I think there could be more down moves but I don't see anything coming along and knocking the wind out of the market," he said in a phone interview from the floor of the NYSE. "Crude coming down $10 in two days -- that is going to be helpful."

We have been hearing strategists tell us they are getting more positive on stocks. The other day, BlackRock's Bob Doll said it was time to get more constructive. Tuesday, Pequot Capital's Byron Wien said the market appears to be forming a bottom. Also Tuesday, Scott Wren and Stuart Freeman of Wachovia said they are changing their sector choices to be more neutral than the defensive stance they've had for the last several years.

Interestingly, one of their moves was to underweight health care, a group they had held at overweight but said was hurt by lack of new products and generic competition. They upgraded telecom to overweight from evenweight and keep technology and energy at evenweight. Financials, they say, should be bottoming but they are not ready to upgrade them yet.

Oil's Spill

Stocks have been on a seesaw trade with oil and on Tuesday that trade reversed, with oil down and stocks flying higher. Oil fell $5.33 per barrel, or 3.8 percent, to $136.04, giving it a two-day decline of more than 6 percent.

Traders say Wednesday is a key day for oil because of the inventory data released by the Energy Information Administration and American Petroleum Institute. Platts analyst survey shows expectations for a 1.9 million barrel draw down in crude, but increases in gasoline stocks of 500,000 barrels and distillates of 2.2 million barrels.

"It depends on how it plays out tomorrow. (Wednesday) If we get a draw in crude inventories of more than 2 million barrels, this (oil) market could rally and take some new shorts out of the marketplace and spark things higher," said Addison Armstrong, director of market research for Tradition Energy. He expects to see a 2.3 million barrel draw down.

"If they build by even a slight amount, that could put some further pressure on crude and the technicals we'd be looking for at that stage would be $133.25 (per barrel)," he said. Armstrong said if that level were reached, the next leg down could be to $127.50.

Armstrong said he believes what's going on in the oil market is temporary profit-taking and the trend is still to move higher. "We haven't seen demand destruction in the areas where we need to see it," he said, noting there have been no figures showing that the reduction of subsidies in Asia is curbing demand there. The U.S. though has seen a drop off in gasoline usage.

"This could be seen as a fairly steep correction in all things commodities," he said.
On the oil front, House Speaker Nancy Pelosi late Tuesday called on President Bush to release a small amount of oil from the Strategic Petroleum Reserve to push down prices.

Other commodities joined in the rout. The Reuters/Jefferies CRB Index of major commodities was down about 2.5 percent. Corn was down 3.3 percent, soy beans fell 2 percent. Copper was down more than 3.9 percent, and gold was down 0.6 percent, or $5.40 per troy ounce to $921.90.

Dollar

The dollar rose 0.41 vs. the euro, taking it to $1.5655 per euro Tuesday. Boris Schlossberg, senior currency strategist at DailyFX.com, said if oil continues to fall that will help the dollar.

"Again we saw positive DJIA (Dow Jones), negative euro trade taking place, exacerbated by sharply lower oil which is dollar bullish," he wrote to us. "In fact, if oil starts to really crater, we see USDCAD (U.S. dollar/Canadian dollar) going higher. Although I am not an oil analyst, I do see demand destruction finally taking place and we may actually move towards the 130 handle ($130 per barrel) which will help the buck even more. The key is for DJIA (Dow) to hold 11K. If stocks swoon and head into 10K territory the move in FX will be to the euro as the safe haven bid not the dollar as in all times past."

Econorama

There are no major economic indicators on the agenda, but well ahead of the U.S. open, European Central Bank President Jean-Claude Trichet will be speaking to a plenary session of the European Parliament. The G-8 also winds down its meeting in Japan overnight.

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