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Apr.20

9:40 PM ET

Monday, 20 Apr 2009

Market Insider: Tuesday Look Ahead

Posted By:Patti Domm

Markets are bracing for a landslide of earnings news Tuesday and more focus on the Treasury's bank bailout plans.

Blue chips Caterpillar, Coca-Cola, Merck, DuPont and United Technologies are among the companies reporting Tuesday. Plus, there is likely to be spillover from Monday's after the bell reports from IBM and Texas Instruments. IBM shares were lower after it reported a slight decline in earnings to $2.3 billion but its revenues slid 11 percent to $21.7 billion, below expectations. Texas Instruments reported net of $17 million, compared to $662 million the year earlier, but its stock rose because analysts had expected a loss.

Group of Securities

Treasury Secretary Timothy Geithner Tuesday testifies at 10 a.m., his first testimony to a Congressional oversight panel on how the government is spending funds in the Troubled Asset Relief Program, or TARP. There is also a second quarterly report due on TARP's progress from Neil Barofsky, special investigator general of the bailout program.

The TARP and the government's stress tests for the 19 biggest banks was the subject of much market chatter Monday. Fears that banks will be found to need a lot more capital hit the sector. Those concerns were compounded by a recent J.P. Morgan report that said banks could need another $400 billion.

Traders also said investors fretted about Administration officials'' comments that the current TARP program is big enough, and they don't need to seek fresh funds for banks. Also Monday, the New York Times suggested the government could forego new funding if it converts loans to common equity, which would be dilutive to existing shareholders.

Market rumors and a speculative blog report added to concerns about the Treasury's stress tests, expected May 4. The S&P financial sector was down 11.4 percent. The Dow fell 289 points, or 3.6 percent to 7841, while the S&P 500 slumped nearly 4.3 percent to 832. The Nasdaq was off 2.9 percent at 1608.

From 'Fast Money':

Your First Move For Tuesday April 21th

Another factor adding to the gloom was Bank of America's earnings report, which, while better than expected, relied on trading results and one-time gains. The banking firm earned $4.25 billion, or $0.44 per share, well above the $0.04 per share expected. But the report also reminded investors that the current gains in bank profits are masking underlying problems.

Bank of America warned of a worsening credit environment and added $56.4 billion to its provisions for credit losses. Its stock was down 24 percent.

The bonds of banks were also hit, but not nearly as much as the stocks. Andrew O'Brien, portfolio manager for Lord Abbett Income Fund, wrote in a quick note, "Corporate bonds are definitely wider today but on a beta adjusted basis, they do not appear to be performing as bad as stocks. Banks and financials do seem to be the worst performing sector, however, consistent with the equity markets."

Treasurys, meanwhile, found buyers as the dollar strengthened and investors dumped stocks. The dollar cracked the important $1.2924 level on the euro. It was up 0.8 percent against the euro. In the Treasury market, the 10-year added 24/32 to 99 6/32, as its yield moved lower to 2.844%. The two-year yield slipped to 0.916 percent.

"All yields are lower across the entire curve," said Brian Edmonds, head of interest rate strategy at Cantor Fitzgerald. He added though that the buying was not a flight to safety move.

Edmonds said traders are focused on Tuesday's Treasury purchases by the Fed, which is expected to acquire 7 and 10-year notes. "Last time, they bought $7 billion. I would expect $5 to $7 billion tomorrow," he said.

There are no economic indicators Tuesday. Other earnings reports of note include Bank of New York Mellon, Schering-Plough, Coach, Delta Airlines, Forest Labs, Lockheed Martin, M&T Bank, New York Times, Northern Trust, Quest Diagnostics, State Street, United Health and Western Union. After the bell, Yahoo reports, as does Capital One, Broadcom, Gilead Sciences, Norfolk Southern, and Hudson City Bancorp.

Group of Securities

"The market's going to be a lot of white noise with all these earnings coming out," said one stock trader. "You'd have to think the market deserves a defensive pullback here."

Getting Technical

Traders have been waiting for a sell off, in a stock market that has risen for six weeks. Scott Redler of T3live.com follows the market's short-term moves on a technical basis, and he believes the pull back may create a buying opportunity for investors.

"The trend line the market's been following since we made our (March) low was breached today," he said. That level would be in the 850 to 853 level on the S&P 500.

"Many investors that missed this rally have been waiting for this type of break so they can find a way in. The question is where's that level?" he said. "We've isolated two areas -- one will be in the 788 to 795 area, which would be 38.2 percent retracement of the move from 666 to 875."

"If that level does not hold, the next line in the sand on whether this rally is validated as strong would be 760 to 765, which would be a 50 percent retracement," he said. "The bulls need those two areas to hold or else everybody's going to be talking about testing the lows."

More From CNBC.com

Patrick Kernan, who trades S&P options at the CBOE, said the options market is pricing in 2.5 percent daily moves currently. "We're still hovering around a 40 VIX so we're still looking at choppy movement," he said. The VIX, the CBOE's volatility index and fear gauge for stocks, rose 15 percent Monday to 39.18.

Kernan, a principle with Cardinal Capital, said he's not as "gloom and doom" as he was in the not too distant past. On the S&Ps, "we held 829 which was a support level for the S&P. We closed above it. That was at least a good sign," he said. Kernan said it's possible the S&Ps fall into the 700s again, but he doubts the market will retest the 666 low.

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