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.
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.)
"The market was much more focused on Indy Mac than what the government did on Freddie Mac," he said.
"The interesting take away from the Freddie and Fannie news was the market reaction was basically such that the government is attacking the symptoms, not the illness itself," said Peters.
As for Bernanke's Tuesday testimony, he said: "I think people were struck by his candor on the state of the economy." He said Bernanke made obvious observations about risks to economic growth and rising inflation, but it was well received by the markets for its frankness.
One of the highlights of the Senate Banking hearing actually came from SEC Chairman Christopher Cox, who also testified along side Bernanke and Paulson. Cox said the SEC will limit the ability of traders to short shares of brokerage firms and Freddie Mac and Fannie Mae. But his comments left traders confused and the SEC, after the close, said it was delaying its emergency order restricting short selling until Monday.
Cox said investors would be required to pre-borrow stock before shorting Fannie, Freddie, or one of the primary dealers, like Lehman. Traders were confused by the Cox comments because shorting a stock without being able to borrow the stock is already illegal and is known as "naked" shorting.
"The bit of news that needs more information around it has to do with short selling. That's the information that caused the most stir out of everything," said Peters.
Addison Armstrong of Tradition Energy said Tuesday's action in the oil markets was a repeat of last Tuesday, when there was very strong liquidation. "The suspicion is ... banks are liquidating some positions. The assumption is they're doing this to shore up their balance sheets," and oil is a good place to take profits, Armstrong said.
Armstrong said he will be watching oil inventory data closely tomorrow, particularly heating oil. He expects distillates to be up 2.5 million barrels and crude to be down 2.2 million barrels.
"We will be looking at heating oil stocks in the Northeast. We are 18 percent below the five year average and this time of year we should be making heating oil," he said.
Earnings reports are expected form Abbott Labs, Delta Airlines, Gannett, St. Jude Medical, AMR and Piper Jaffray. After the bell, earnings are due from eBay and Yum Brands.
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