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Market Insider/Wednesday Look Ahead

The exuberance of Tuesday's stock market rally is likely to wane as investors begin to anticipate Wednesday morning Congressional testimony from Fed Chairman Ben Bernanke.

Bernanke appears before the Joint Economic Committee, starting at 9:30 a.m. He speaks on the economic outlook, but traders anticipate he could be questioned about the Fed-orchestrated buyout of Bear Stearns buyout. The Fed said in a statement late Tuesday that it approved the J.P. Morgan acquisition of Bear.

On Thursday, Bernanke testifies specifically on the markets and the Bear Stearns deal before the Senate Banking Committee, where he will be joined by Treasury Undersecretary Robert Steel, J.P. Morgan Chairman Jamie Dimon, and New York Fed President Timothy Geithner.

"Pretty worrisome to traders is Bernanke testifying ... with the market still fragile despite today's performance," said Art Cashin, UBS director of floor operations. "We've got a couple days of volatility here."

Joe LaVorgna, chief U.S. economist at Deutsche Bank said Bernanke's speech is likely to last less than an hour but he will then be questioned. Unlike his semiannual economic report to Congress, Bernanke may reveal more of his personal view, not the view of the entire FOMC. He said Bernanke, therefore, may come off as sounding more "dovish."

"We expect Bernanke to have plenty to say about the recently implemented Fed liquidity measures, particularly since they appear to be having a positive impact on bank lending and the financial markets," LaVorgna wrote.

"We expect the chairman will try to defuse criticism that the Fed is "bailing out" Wall Street with Main Street's dollars -- he will almost certainly be asked about this in the Q and A."

Econorama

Also on the agenda Wednesday is the release of the ADP employment report, at 8:15 a.m. Expectations are -80,000 for March, compared to -23,000 for February. Traders watch the number with the expectation it may foreshadow the monthly government jobs report, which is due for release Friday. Factory orders are reported at 10 a.m., and oil inventories are reported at 10:30 a.m.

Market Mayhem

The Dow rose 391 points or 3.2 percent on the first day of the second quarter. The S&P 500 rose 47 points or 3.6 percent, and the Nasdaq rose 3.7 percent or 83 points. At the same time, the dollar rallied against the euro, gaining 1.2 percent. It rose 2.3 percent against the yen. Oil slipped 0.6 percent to $100.98 per barrel, and gasoline rose 1.21 cents per gallon, or 0.5 percent to $2.6392 per gallon.

Who would have believed at any time during these past months that on the day a major bank announced a $19 billion writedown, the stock market would stage such a stunning rally. Financials were the standouts, up 7.5 percent followed by consumer discretionary shares, up 4.3 percent. Banks like J.P. Morgan, Citigroup and Bank of America all were winners even though UBS announced it would take another $19 billion in writedowns, bringing its total to $33 billion. The bank also said it was going to raise $15 billion through a rights offering.

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Traders said the stock rally was driven in part by the reallocation of funds into the equities market. There was also the sense that the writedowns are beginning to peak. Goldman Sachs in an early morning report chopped its earnings estimates for Citigroup and Merrill Lynch and forecast a new $12 billion writedown for Citi and another $2 billion for Merrill.

Lehman stock, meanwhile, was also a winner after it said it was making a $4 billion preferred stock offering. The firm's CFO Erin Callan explained reasons for the offering on Closing Bell and she also acknowledged that Lehman is helping the Securities and Exchange Commission with its investigation into short selling. The firm's stock, somewhat like the stock of Bear Stearns, was targeted by short sellers. CNBC's Charlie Gasparino was first to report the firm was actively helping the SEC investigate activity in its shares.

"We're in a market where perception trumps reality," said Callan in an interview on Closing Bell. "Despite the fact we got through our earnings call well, our stock rebounded. We think we distinguished our business model in every way that was appropriate form the risks that were associated perhaps with Bear Stearns."

"We did see last week that we in particular, and it's an industry issue, but in particular I think we came under the white hot lights around the rumors and suppositions with respect to the strength of our firm. As opposed to waiting to see that play out, we felt it was necessary and aggressive to make a statement."

The bounce in Lehman, its battle against the shorts and the market's ability to rally in the face of negative news on UBS encouraged traders who are trawling for a bottom in financial stocks.

"I think they've been oversold," said Vince Farrell, managing director with Scotsman Capital. "I think they're going to continue to trade well for another five or 10 percent...but the volatility has not left. it will still be enormously volatile."

"They probably will trade well into the earnings announcements. The earnings will probably be a little better than is feared," said Farrell, a CNBC contributor.

Cashin says Tuesday's rally may well be set to fade away. He pointed to two 400 plus point days last Tuesday and the Tuesday before. "If it's Tuesday, we must be up more than 380 points," he said.

"Unfortunately, this has many of the aspects of the other two rallies, which pretty much faded," he said. "All the beaten down stocks were the favorites which lends a tone of short covering to it."

Earnings Central

Some important earnings are expected Wednesday, including Monsanto and Best Buy , before the bell, and Research in Motion , which reports after the bell.

Stocks to Watch

Pfizer fell in late trading after it halted trials for its skin cancer drug after a study showed it was not any more effective than chemotherapy.

Questions? Comments? marketinsider@cnbc.com

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    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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