Stocks go into Friday facing important manufacturing and housing data and, of course, more turbulence.
Oil again is a major a factor traders are watching. Crude chugged slightly higher Thursday, breaking a losing streak. Oil was up $1.05 to $125.49 per barrel.
The Senate also considers the housing bill, adopted by the House Wednesday. The legislation would insure up to $300 billion in refinanced mortgages and provides for a new regulator and government back stop for mortgage giants Fannie Mae and Freddie Mac .
Economic data Friday includes durable goods orders, at 8:30 a.m.. New home sales and consumer sentiment are reported at 10 a.m. Realtytrac is also expected to release new foreclosure data.
"We expect the pace of the manufacturing economy to be slow and we expect the durable goods orders to be slow. There's a built-in preconceived notion that all the economic data we get (Friday) is going to be negative," said Jefferies and Co chief market strategist Art Hogan.
The bears returned Thursday, driving stocks sharply lower after a surprise increase in weekly jobless claims and data that showed existing home sales at a 10-year low in June. The Dow slid 283 points or 2.4 percent to 11,349, its biggest drop since June 25 and lowest close since July 16. The Nasdaq fell 45.77 points or 2 percent to 2280.11, and the S&P 500, down 29.65 points, or 2.3 percent to 1252.54.
Even with the stock market's crabbiness, the dollar again moved higher. It was up 0.5 percent against the euro, its third straight day of gains. Of course, the sagging European economy might be a factor. Check out the drop in German business sentiment Thursday, at its lowest level since September, 2005.
Hogan said Friday could also be odd because it is a summer Friday, usually a low volume day. "The problem is if today (selloff) happened a week ago, we'd be saying it's like just another day. But then we got used to the market going up, and today feels like it's the end of the world as we know it. But that's not the case. It's just another step in the process."
He said a big question is whether Thursday's selloff is a one day event or the beginning of a new selling wave. "I wouldn't give too much credibility to whatever we do tomorrow (Friday), but I think we got more selling than we needed to out of the way today. I don't think we're going to have a big upside leg but I think we overdid it in the short run," he said in a phone interview Thursday.
It's ironic that one of the stocks at the heart of Thursday's selling spree in the financials sector was left off the SEC's list of financial institutions it is protecting with new rules on naked short selling. That stock, Washington Mutual took a huge dive amid concerns about its funding sources. The company, in a statement, said it does not rely on commercial paper to fund its business, disputing an analyst report that raised the issue. Earlier in the week, WaMu said it was adequately capitalized to get through the housing downturn.
Housing blues were the theme du jour Thursday. Besides a more than 6 percent sell off in the recently rebounding financials, home builders were also under fire. The Philly Housing Index, off 8.6 percent, and S&P Homebuilding Index, off 10 percent, both had their worst days ever.
The S&P financial sector is still up just about 0.4 percent for the week, going into Friday.
Energy stocks have been the week's big losers so far. Birinyi Associates issued a note saying the energy sector is now the most oversold it has been since 2002. It pointed out that as of the close Wednesday, the sector is the most oversold its been since the market bottom exactly six years ago on 7/23/02. Birinyi also pointed out crude is down 14.4 percent from its July 3 high, and since 1985, there have been 45 corrections in oil bull markets. The average decline has been 13.73 percent over 25 days.
Birinyi also points out that on May 21, it sent out a bulletin noting that most energy stocks in the S&P 500 were overbought. Since that date, the sector is down 18.8 percent, and 33 of the 39 stocks are now oversold. None are overbought. For the week, energy stocks are down 3.74 percent. They are down 15.4 percent for the month.