Watch for more triple-digit market moves Thursday.
Stocks could just as easily be up as down if you look at Wednesday's action. Even after major central banks joined the Fed in an unprecedented global rate cut, stocks ended lower Wednesday after a volatile 400 point swing in the Dow.
"I would guess some of the selling in the industrials has burned itself out for now," said Robert Harrington, head of the UBS block desk. He pointed to gains in materials, the best performers of the day with a 2.6 percent gain. Industrials finished nearly flat, and energy was up about 0.9 percent. "The overcrowded slow growth global economy liquidation at least lessened today from where it had been in the last five days ... I think the market is in for a short-term reversal."
Harrington said the triple-digit moves could continue, and the late sell off in stocks Wednesday had to do with programmed trading. "I think it's thin and the moves can be wild. Volatility is going to remain with us. It'll lessen at some point. People are just going to be indifferent, and the volatility is going to scare people away," he said.
A factor in Thursday's market may also be the end of the short-selling restrictions on financial stocks. Traders have been watching this closely. Financial stocks lost 3 percent Wednesday and are down 17 percent for the week.
The Dow Wednesday finished down 189, or 2 percent at 9258, and the S&P 500 was down 11 or 1.1 percent to 984. The dollar fell 0.4 percent against the euro, at a level of $1.3667 per euro.
IBMpreannounced its preliminary third-quarterearnings late Wednesday, which beat analysts' expectations, and affirmed its full-year profit outlook, sending shares up 4 percent. IBM's third-quarter net income rose 20 percent to $2.8 billion, while earnings per share from continuing operations rose 22 percent to $2.05. Revenue rose 5 percent to $25.3 billion, including 3 points from currency benefits. Analysts were looking for earnings of $2.01 per share on revenue of $26.5 billion.
The volatility certainly won't end Thursday as the G-7 gather in Washington, and traders watch over the next couple days to see if the world's central bankers have any other tools to soothe credit markets and funnel capital into the ailing global banking system. Treasury secretary Hank Paulson makes a statement Friday evening, and the group meets into the weekend.
"I don't think they're going to announce anything that will make the markets feel better unless they have something up their sleeves," said Joseph LaVorgna, U.S. chief economist at Deutsch Bank.
LaVorgna said the markets will likely find little of interest in Thursday's economic data - weekly jobless claims (8:30 a.m.) and wholesale trade (10 a.m.). "The numbers only matter to the extent that the economy is weaker than people thought. You want to look at credit card delinquency, auto loan delinquency and you want to look at signs of consumer stress," he said. On Tuesday, the Fed reported that consumer credit dropped a record $7.9 billion in August.
Another sign of consumer weakness came in Wednesday's chain store sales reports for September. Most stores turned in surprisingly negative results, and there are a few more reporting Thursday.
LaVorgna said he may ratchet down his view on the economy, but he is waiting to see what the TARP plan does. The TARP is the troubled asset relief program, approved by Congress, and under which the government will buy soured mortgage assets from financial firms.
Flight to Quality
For quite awhile, the report from the Treasury markets has been about the "flight-to-quality" trade where investors pile into Treasurys out of fear about other types of investments. On Wednesday, that trade shifted during the day, and CNBC's Rick Santelli said he believes it might be a significant signal.
He said yields on two-year and 30-year Treasurys, representing both ends of the market, bounced off record lows. He said it may indicate the very beginning of a thaw in credit markets. There was a move up in the yield on the one-month T-bill during the day but some of that faded by the end of trading.
The 10-year fell 1-25/32, raising its yield to 3.717 percent and the two-year's yield rose to 1.621 percent. Treasurys sold off on expectations of new debt supply and after a weak reception in an auction for a 10-year note issue.
Miller Tabak's Tony Crescenzi, who follows credit markets, said he saw "compelling signs today suggesting glimmers of light" in the credit markets. He also pointed to the spike in Treasury yields, a drop in the 10-year swap rate and the fact that Fannie Mae sold T-bills well below recent revels. "All of these suggest a movement toward risk taking," said Crescenzi in a note.
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Not everyone I spoke to was as optimistic about the credit markets, but it would make sense for a thaw to start as a slow trickle instead of a gusher.
In the mortgage market, Smith Breeden's John Sprow said there was less volatility. "In my neck of the world, it's surprisingly non volatile," he said. That would be commercial mortgages and subprime.
"We moved the volatility to equities and now Treasurys. Various non-agency mortgages were moving 2, 3, 4 percent, and they're not any more, and they haven't been for two weeks," said Sprow. He said it may be meaningful that since it was the subprime mortgage arena that started the credit crunch and it was the fist signs of strain, that it has gotten to be pretty quiet. "Ultimately, it may play out that subprime is the first to show stability. It was the first to go down."
CNBC's Charlie Gasparino reported that federal officials were pushing Citigroup and Wells Fargo to end their tug-of-war over Wachovia and reach an agreement on how to break up the bank.
Walgreen, after the bell, said it was giving up on its $75 per share bid for Longs Drug Stores after Longs sided with CVS Corp's $71.50 per share offer.
In earnings news, Chevron gives an interim update Thursday.
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