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Market Insider: Thursday Look Ahead

Stocks will be on inflation watch Thursday. Volatile trading in oil and commodities promises to spill into the stock market again. On Wednesday, energy and other commodities rose, reversing a selling trend and worrying investors, who have been hoping for a reprieve from inflation.

Some hard data on inflation is also expected when the consumer price index is reported at 8:30 a.m. July CPI is expected to rise 0.4 percent.

Other important pre-opening reports include weekly jobless claims, expected to come in at 435,000, and Wal-mart's earnings. Investors will be watching Wal-mart's outlook and comments about the important back-to-school shopping season.

Market Mayhem

Wednesday's stock market was again skittish about the financial sector. The trigger was, in part, a Merrill Lynch downgrade of several firms. Stocks also took a hit as oil prices began bubbling up after weekly inventory showed declines in the supply of crude, gasoline and distillates in the last week. The oil market is also becoming more sensitive to news of Russia's military action in Georgia.

"This is not a trading tape. This is a Rorschach test. Anybody who looks at it can see whatever they want to see," said UBS' Art Cashin of Wednesday's stock market action.

The Dow fell 109.51 points, or 0.9 percent to 11,532, and the S&P 500 tumbled 3.76 points, or 0.3 percent to 1285.83.

Cashin, director of floor operations, said the "cocktail napkin" technicians thought the area where oil would find support was $110 to $113 per barrel. If it had broken down through that level, it could dip to $80. Or if not, it could bounce. Bounce it did, rising $2.99 per barrel Wednesday, or 2.7 percent to $116.

"The big deal is if it holds and closed over $115.60, it might have set the chart up for a real short squeeze. If it gets to $117, it will trap those shorts," he said. Energy stocks were Wednesday's winners, gaining 3.4 percent.

Also critical Thursday will be what happens in the financial sector, which was down nearly 3 percent Wednesday after a more than 5 percent decline Tuesday. Merrill Lynch downgraded Citigroup, Goldman Sachs and Lehman to underperform Wednesday. Merrill's chief investment strategist Richard Bernstein also said the credit crises is broad and deep and not likely to end soon, a comment that also sent a chill through the sector

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CNBC's Charlie Gasparino reported Wednesday that J.P. Morgan, Morgan Stanley and Wachovia are close to settling with regulators on allegations they misled investors on the sale of auction rate securities. "Mr. Gasparino has had an influence," said Cashin of Gasparino's reports on CNBC. "Whenever he comes on, the financials lift their heads." He said they also dipped down as the market awaited the official word of the settlements.

Another factor that may be affecting financials is the expiration of the SEC's temporary naked short rule. The rule was enforced on 19 financial stocks and required brokers to locate the stock they need before shorting it. Richard Bove of Ladenburg Thalmann thinks the end of the rule Tuesday night already has had an impact. "The anecdotal data I am receiving suggests that shorting these companies was resumed with a vengeance," he wrote.

"The theory is that the paired transaction which was in place, had investors buying utilities and shorting financials. When the SEC controls were put in place, the positions were reversed allowing the financials to recover in price and forcing the utilities to fall back."

Bove said in the past two sessions, the positions may have reversed again with "devastating impacts on the financials and positive impacts on the utilities." Utilities Wednesday were up 0.8 percent.

Bottom Dollar

The big story in the foreign exchange market was the British pound which took its biggest tumble since October 2006. The Bank of England cut its growth forecast in the quarterly inflation report, which also showed continuing signs of economic deterioration.

The dollar fell 0.04 percent against the euro and 0.20 percent against the yen. Commodities rallied. Gold climbed $16.80, its first gain in nine days and its biggest up move in a month. It finished at $825 per troy ounce. Silver was up 2.5 percent, and copper was up 4.1 percent.

In the grains market, corn, wheat and soy beans all shot higher. "I think in particular to corn, the market has now had the most bearish (crop) report for the next 18 months and it rejected it soundly yesterday. It was down 10, closed higher and closed limit up today," said Emily French, senior vice president at Macquarie Bank Ltd. "It's like we're setting ourselves up for the same run we saw last year."

French, who specializes in grains, said the liquidation in those markets in the last couple weeks was not "fundamental" and the market overshot in its move down. She also said the grain market was not impacted by the rising dollar, like other commodities markets have been, and that investors are underestimating the price inelasticity of food.

"What you're seeing now is daily trading ranges that are what we used to trade three years ago, for the entire year. That really puts today's market in perspective. If you look at November (soy) beans, we had a 72 cent trading range. Three, four years ago, that was the range for the whole year," she said. "... This is a structural change. We're not in a bull market, we're in a structural change. We're remaking history."

For Thursday, "I think everyone's going to stay very small. People are on holiday. Europe's on holiday. I don't see people saying, 'we've got to start this bull market today.' I think we're going to chop around."

Questions? Comments? marketinsider@cnbc.com

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Featured

  • 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 Senior Commodities Correspondent and Personal Finance Correspondent

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

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