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Market Insider: Wednesday Look Ahead

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.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

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

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.