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Market Insider: Wednesday Look Ahead

While some traders are bracing for a retest of the stock market's November lows, buyers are picking among the less defensive sectors on the hopes the market is approaching a turning point.

"I'll go out on a limb and say, I think we've seen the bottom. I think too many people are expecting a retest of the November lows and in my experience, when everyone is expecting something, it never happens," said Tim Smalls of Execution LLC. Other traders though say the market is more likely than not to head for its lows even though it has been finding support.

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Investors are keeping a close eye on Washington where the Senate is tackling the fiscal stimulus plan and the Treasury will soon unveil a new plan to bail out banks. Traders said the market reacted well to a Republican stimulus proposal, floated Tuesday, that would introduce a corporate tax reduction and tax break for home buyers. Plus, the market responded well to comments from Treasury Secretary Tim Geithner that fiscal policy would get very aggressive.

Concerns though that a bank bailout plan would further disadvantage shareholderspushed financial stocks lower Tuesday. The financial sector fell more than 2.5 percent in an otherwise up market.

The S&P consumer discretionary sector, which tracks retailers, home builders and media, was the best performer, rising 2.9 percent. The second best performer was health care, a sector that has outperformed since the November lows. Technology, which saw buyers Monday, rose another 1.8 percent.

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The Dow finished 141 higher at 9078 and the S&P was 13 higher at 838. The Nasdaq was up 21 at 1516.

On Wednesday, the ADP private sector employment report is released at 8:15 a.m. and is expected to be down 535,000. ADP's survey is viewed as an early warning of how the government jobs report may look when it is reported Friday though it often does not mirror the government data. Economists expect the January jobs report to show a decline of 525,000 non farm payrolls and an unemployment rate of 7.5 percent.

Non manufacturing ISM is reported at 10 a.m. and is expected to come in at 39. The ISM manufacturing survey, reported Monday, showed contraction but was better than expected and some traders saw it as signaling the possibility of stabilizing in the economy.

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Earnings news will also affect morning trading. Reports are expected from Time-Warner, Clorox, Kraft Foods, Alcatel-Lucent, ITT and Sara Lee. Cisco reports after the bell Wednesday, as does Pulte Homes, Visa and Sunoco. Disney, which reported after Tuesday's bell, saw its stock fall after it said profits fell 32 percent. Electronic Arts shares rose though, even after the company missed analysts' estimates in its after the bell report.

"As long as we stay above the November lows on the Dow, there's asset allocators that come in and are putting money into equities," said Michael Franzese, head of government bond trading at Standard Chartered. "They're taking a shot that those November lows are going to hold."

Treasurys sold off along the yield curve Tuesday. Short duration T-bills saw redemptions and tax selling, he said. "The reason the main Treasurys have so much pressure on them is because the Republicans are floating the idea of 4 percent mortgages," he said.

"Everybody is preparing for the employment number that's coming out Friday," said Franzese of what he expects to see in Wednesday's market. But he also said the big story many traders are watching is the $65 billion refunding announcement from Treasury Wednesday morning. "The big question is whether they're going to reissue the 7-year,:" he said.

Franzese said a 7-year would be helpful to the Treasury market since that its closer to the duration of a mortgage than the 10-year. The 10-year Tresasury yield rose to 2.842 percent, as investors sold Tuesday. The two-year saw its yield rise to 0.946 percent.

The weakening dollar was another catalyst for stocks. The dollar fell 1.5 percent against the euro and 0.2 percent against the yen Tuesday.

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.