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Market Insider: Wednesday Look Ahead

Stocks are challenged to hold their ground, and will have a tough time breaking out of the bear's hold this month.

Here's some of the things people are talking about as concerns for the market in the next couple of weeks. First, oil may stop being the bullish catalyst it's been for stocks even if the decline continues. Third-quarter economic news will increasingly look weaker. Financial companies still pose problems. Third-quarter earnings warning season could be noisy, and forward guidance won't be anything but weak. The credit crunch just won't let up, and frankly, none of this is surprising.

"Third quarter is always a tough quarter, and in many respects, the quarter is made or broken in the first two weeks of September," said Citigroup Chief U.S. Strategist Tobias Levkovich of the corporate earnings picture.



"It tends to be a month where you can get lots of surprises, and often those surprises aren't to the upside," he said in a recent phone interview.

As for Wednesday's market, investors will be watching factory orders at 10 a.m. and August monthly auto sales data, reported throughout the day. The Fed's beige book is released at 2 p.m. Before-the-bell earnings include Staples and Signet . Hovnanian and H & R Block report after the bell.

The first trading day of September left a lot to be desired, and some market analysts are looking at it with trepidation. The Dow ended the day down 26 at 11,516.91, after erasing a 246 point gain. The S&P was off 5.25 at 1277.58, and the Nasdaq fell 18 to 2349 as big tech stocks sold off.

The dollar rose O.7 percent against the euro, to finish at $1.4506 per euro. The 10-year Treasury added 19/32 to 102-3/32, lowering its yield to 3.746, its lowest level since April 23. The two-year's yield slid to 2.270 percent. Talk was that sovereign funds were placing their dollar bets on Treasurys.

Oil Drill

Oil fell nearly $6 Tuesday and was off its lows of the day at the close as oil companies continued to give the all clear that there was little impact from Gustav. Oil fell as commodities dropped across the board and the dollar rose. Gold fell 2.9 percent or $24.30 at $805.00 per troy ounce. Silver was down 4.1 percent and copper was down 3.1 percent.

CNBC's Charlie Gasparino reported late in the day that Osprai Fund, a big commodities fund partly owned by Lehman, is closing down after incurring big losses. The news follows on rumors that someone had placed some bad bets, particularly in natural gas. Gasparino reports the fund has been unwinding for some time.

In the stock market, the commodities sell off made its mark. Energy stocks were down 4.6 percent and materials stocks were down 2.5 percent.

"I'm still very cautious on the industrial commodity area because that's the stuff investors want to believe in," said Levkovich during our discussion. He said the idea that global demand would be strong enough to keep driving the group higher has been proving wrong but investors still cling to the trade.

Levkovich said oil is one item he is watching closely for its impact on the consumer but also interestingly for its potentially positive market impact. "Historically, when we've seen oil prices come down from very sharp divergences we tend to see 10 to 20 percent moves in the market in six months," he said. Levkovich has a target of 1475 on the S&P by year end.

Biggest Reversal

The Dow's big swing Tuesday was its biggest one day reversal since the start of the bear market Oct. 9, according to Birinyi Associates. At its peak, the Dow was up 1.87 percent. Birinyi says of the 15 market days since October when the Dow was up more than 1 percent at 10 a.m., only four sessions closed lower than the 10 a.m. price and most of them showed little follow through selling the next day.

J.P. Morgan's chief U.S. equities strategist Thomas Lee and other J.P. Morgan analysts said in a late day note Tuesday: "Reversal days are not a good sign as it shows a sufficient level of buyers was not available to sustain the initial move up." That comment fits with the observation of traders that there was heavier volume during the afternoon selling than during the morning's big up move.

Testing Lows

Lee goes on to say that the move makes him question whether the July 15 low can be trusted "if buyers are already exhausted." But he said the "disinflation" trade sectors, financials and discretionary stocks were stronger Tuesday, which encourages him that the bottom probably was made on July 15.

The idea of testing those lows has been a topic of conversation for weeks. In fact, it was a topic of a conversation I had with John Roque, Natixis Bleichroeder senior vice president, technical analysis.

On the S&P 500, "1300 looks to be a big level. I'd say the inability to get through the 1300 level, and a failure from here could be a real short-term leg under 1263. I would say it's not out of the question you make new lows in the short term."

"It wouldn't surprise me if it broke through there, if you took it down to the 1145 and 1150 area," Roque went on to say.

"There's continued frustration. This is part and parcel of a bear market. When you look like you're going to rally, you fail and when you look like you're going to be up, you go down. You've essentially been sideways since late July," he said.

Econorama

Friday's August jobs data is the big number the market is watching this week.

"It's going to be negative. The question is how much. the consensus is minus 75,000 ... I would be more surprised to see a number closer to zero than I would be to see a number closer to negative 100,000 or 150,000," said Joseph LaVorgna, Deustche Bank chief U.S. economist.

"We might be due for one big negative number," he said. "A better number would be more surprising."

"Here's the litmus test for the economy. Are things better now or worse than they were in the fourth quarter of last year? I think the answer is you'd have to be a real optimist to say they're mixed," he said. He said economic growth is worse, credit conditions are tight, money market stress is getting worse. "We're going into quarter and and year end and this is now a year forward, and there's still the stresses on the money market. The economy is very fragile."

LaVorgna said he too is watching oil but that it would have to fall much further to act as a stimulus for the economy.

Away for Awhile

I will be away for awhile. Market Insider will return Sept. 15.

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.

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  • 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.