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Market Insider: Tuesday Look Ahead

The fourth-quarter earnings season has barely begun, and Wall Street's already cranky mood is getting worse.

Alcoa , the first Dow component of the earnings season, reported a wider-than-expected lossfor the quarter Monday in its after-the-bell release. Its poor showing followed a day in which financial shares had their worse sell off in weeks on fears of big losses when that sector reports earnings next week. Also, details from the Obama Administration on how financial firms taking government funds could be restricted also hurt shares.

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Tuesday's markets will weigh a speech by Fed Chairman Ben Bernanke ahead of the open. Bernanke speaks at the London School of Economics and takes questions after his 8 a.m. ET talk, entitled "The crisis and policy response." Traders will watch this for clues as to what other moves the Fed may make in an environment where it has essentially taken interest rates to zero.

International trade is reported at 8:30 a.m., and the NFIB small business survey is released at 7:30 a.m.

TARP-edoed


The markets will also be following an afternoon hearing of the House Committee on Financial Services on the Troubled Asset Relief Program (TARP). Fed Vice Chairman Donald Kohn is among those appearing before the committee.

President Bush, at the request of President-elect Barack Obama, asked Congress Monday to approve release of the remaining $350 billion in TARP funds. Former Treasury Secretary Larry Summers, incoming director of the White House National Economic Council., said in a letter that the TARP funds should help prevent foreclosures, ease up lending, but also limit dividends and executive pay for banks taking the funds. Financial stocks were already under pressure on concerns about earnings and fears that Citigroup could report a huge loss next week.

The S&P financial sector finished down 5.7 percent. Citigroup was one of the worst performers, down more than 18 percent. Citigroup is in discussions to merge its brokerage operations with those of Morgan Stanley in a joint venture, and a deal could be announced this week. Some traders see the spin out of Citi's Smith Barney operation as a precursor to other moves to pare down the financial giant as it struggles to rebuild its capital.

"I think there's a lot of second thinking about this magical merger," said Art Cashin, director of floor operations at UBS.

Stocks to Watch

The Dow Monday fell 125, or 1.46 percent to 8474. The S&P 500 slid 20 points, or 2.26 percent to 870.

In the after-hours session, J.P. Morgan shares rose after traders saw its announcement it would release earnings this Thursday instead of next Wednesday as a boost to confidence. Alcoa moved slightly higher after it reported a $1.2 billion loss, its first loss in six years. The stock had been under pressure during the trading day on negative comments from an analyst.

CSX , though, fell after the bell when it warned fourth quarter earnings would be below expectations.

Return of Fear

Worries about the health of financial companies paralleled fresh fears about the credit crunch and weakness of the global economy. Those concerns showed up in a sell off in commodities markets, where gold, copper, and oil all fell. Oil was down 8 percent to $37.79 per barrel.

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The dollar, meanwhile, was higher against the euro , but the yen gained as investors showed aversion to risk assets. Bond prices were mixed. Buying in the 10-year pushed its yield to 2.31 percent from Friday's 2.40 percent.

The Hunker Down Trade

Brian Belski, Merrill Lynch U.S. sector strategist, released a note Monday advising investors to trim low quality gains. He wrote that stocks in the S&P with the lowest quality ranking outperformed those with highest rankings by 30 percentage points since November's lows. Stocks with higher leverage outperformed those with lower debt levels by 10 percentage points during the same period.

Belski said investors should focus on sectors with low leverage and a way to fund themselves. He said discretionary, staples, health care, technology and materials have done the best job deleveraging over the past 10 years. Health care and technology have done the best job growing cash as a percentage of assets in that period, and as a result are best positioned to handle the credit crunch.

"You had a big rally in low quality even though spreads have not come in materially," he said in a phone interview. Belski said the turn to low quality can sometimes lead a recovery. "But what you've seen in the last couple of days is people are trying to get out of these."

"There's a very good chance that the deep downward bent to the market is not going to be around in 2009, but volatility is here to stay," he said. "Part of it is investors when they see a gain, they want to take it and protect it."

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.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • 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.