It's the beginning of a make or break period for the stock market's current run.
The first-quarter earnings season kicks off Tuesday with Alcoa's after-the-bell report. While first-quarter profits are expected to be terrible - down 36 percent for the S&P 500 - traders have been hoping the earnings season will bring with it some clarity about the second quarter and beyond.
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Now in its fifth week, traders have been expecting the stock market's rally to lose steam, and they see earnings as one key to the duration of the uptrend. Some of the market's move up has been based on the view that the economy could be starting to bottom and may show signs of recovery late in the year. Traders say investors are pinning their hopes on the idea that corporate America will help confirm that belief.
On Monday, stocks closed slightly lower but well off the day's lows. The market started the day on a weak note, after widely-watched bank analyst Michael Mayo issued a note saying bank losses could be worse than during the Great Depression.
"I think it was more of a buyer's boycott," said UBS director of floor operations Art Cashin. "There was no news, and the president's not on TV, and everybody in the media is talking about the Mayo report."
The Dow was off 41 at 7975, and the S&P 500 was off 7 at 835. The Nasdaq was off 15 at 1606. Traders say it was encouraging the market closed above 830, a key target on the S&P 500.
From 'Fast Money':
Shares of Alcoa , a Dow component, declined ahead of its earnings report. The company is expected to lose $0.52 per share, compared with a profit of $0.44 in the year earlier. Aluminum prices are down nearly 60 percent since the first half of last year, and Alcoa has felt the pain.
Besides Alcoa, investors will be watching for results from retailer Bed, Bath and Beyond . Consumer credit for February is reported at 3 p.m., and another event of note is the Council of Institutional Investors spring meeting where Goldman Sachs CEO Lloyd Blankfein is speaking.
Cashin said the Passover and Easter holidays should make for light trading in the holiday shortened week. Markets are closed for Good Friday, and the bond market closes early Thursday. Participants will also leave early for Passover on Wednesday.
"We should be setting up for a kind of sideways saw tooth consolidation," he said.
Treasurys saw some selling pressure ahead of a 10-year TIPS auction Tuesday; a 3-year note auction Wednesday and a 10-year note auction Thursday.
Zane Brown, fixed income strategist at Lord Abbett, said the Treasury market will likely be under pressure despite purchases in the market by the Fed. "I think as the week wears on, it's likely to probably fade a little bit under the pressure of supply," said Brown.
In a reversal of last week, the dollar Monday strengthened, and many commodities sold off. Gold, in a third session of declines, saw its gains for the year wiped out. Since stocks started to move higher in early March, traders have been buying in some riskier assets and selling in safe haven plays on the idea the recession was bottoming.
In a note Monday on global asset allocation, J.P. Morgan said it was long equity and credit on expectations for a mid-year end to the recession and long bonds on quantitative easing. The firm said it was turning more positive by adding to cyclical stocks, financials and emerging markets. In fixed income, it says it stays positive across riskier assets.
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Oil Monday fell $1.46 per barrel to $51.05. Gold, meanwhile, tumbled $24.10 per troy ounce, or 2.7 percent to $871.50, in its biggest decline since March 24. It is down 1.4 percent since Jan. 1 and off 24 percent from its November high.
"The big story in the currency market this week is whether equities have more juice. If we see equities dragged down, they take everything with them," said Boris Schlossberg, director of currency research at GFT Forex.
"The currency market is looking to the equities market, and they are watching earnings to see how it's going to trade. The risk story is being driven by equities to see if the bottom is in," he said.
Brown, who appeared on "Street Signs" Monday, pointed to interesting moves in fixed income markets that also show an increased interest in riskier assets. For instance, $900 million poured into high yield funds last week.
"In the last three weeks, we had a total of more than $2 billion that came in. In all of 2008, there was $2.2 billion," said Brown. "It says that investors have changed their risk appetite. They are willing to take on a bit more risk than in 2008. It may well be that high risk purchases are substitutes for money going into the equities market but that hasn't stopped the equities market from going up as well."
Brown said emerging markets have also seen a lot of inflow. Important to these markets was the commitment by G20 to triple IMF funding last week. Another positive was Mexico's plan to activate an IMF credit line and Turkey's decision to negotiate on a new loan deal.
"They (investors) looked at what Mexico did when it raised its hand for another program," said Brown. "That removed some of the stigma ... Mexico did it voluntarily and that was encouraging."
"More money is coming off the sidelines. In high quality corporates, they have legged. We've seen it coming into mortgage-backed securities. We've seen huge inflows into commercial mortgage-backeds (CMBS)," Brown said.
As for corporates, "they're not narrowing as dramatically as emerging markets, high yield and asset-backed securities ... I think people have changed their appetite for risk and it's being expressed in those asset classes. it was almost the case, the more risk you took in the bond market, the better off you were."
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