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CNBC ON DIGG

Wall Street Pulls Back — How Deep Will Losses Go?

Published: Monday, 22 Jun 2009 | 8:26 PM ET

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By: Patti Domm
Executive Editor

Wall Street is getting some of the pull back it's been looking for, and the question now is how deep will it bite into the market's recent gains.

Stocks, bonds, commodities and the dollar Monday, all traded in a pattern contrary to the "recovery" trade. Stocks had their worst day in two months, with the Dow down 200 or 2.4 percent at 8339; the S&P 500 off 3 percent at 893, and the Nasdaq off 3.4 percent at 1766.

A New York Stock Exchange trader.
Oliver Quillia for CNBC.com
A New York Stock Exchange trader.

Monday's sell off was blamed on new concerns about the state of the economic recovery. Traders pointed to a World Bank report that reinforced these worries. The report said prospects for the global economy remain "unusually uncertain." At the same time, the World Bank cut its forecast for the global economy to now contract by 2.9 percent, compared to its earlier forecast of a 1.7 percent decline.

Tuesday marks the start of the Fed's two-day meeting, which ends Wednesday with a statement at about 2:15 p.m. Big for the markets Tuesday could be the existing home sales data for May at 10 a.m.. Economists expect to see sales at 4.8 million, up 2.6 percent. The Richmond Fed releases its monthly survey, also at 10 a.m.

It is also is the first of three days of Treasury auctions with the issuance of $40 billion in two-years.

The dollar [$$USDEUR Loading... () ] Monday, was mostly higher, gaining 0.6 percent against the euro, to $1.3866, as commodities sold off. The Reuters-Jefferies CRB index of 19 commodities was down 2.7 percent to 246.07. Oil [US@CL.1 Loading... () ] was down 3.7 percent at $66.93 per barrel as the front-month contract expired. Copper fell 5.3 percent, and corn was down 3.5 percent. Copper's decline was attributed to reports that China may buy less copper and other industrial materials during the second half of the year.

Meg Browne, currency strategist with Brown Brothers Harriman, said traders latched on to the World Bank report but sentiment was already negative, and in itself, it may not have moved the market. "The second half of the year is coming. (Investors) could be looking at the quarter end and cutting back on positions, or looking for that to happen," she said.

Reversing the Reflation Trade

Materials and energy stocks were among the worst performing S&P sectors Monday. Profit-taking in materials drove the group down 5.3 percent. Since June 11, the sector has lost a third of the 60 percent gain it realized since early March. The energy sector has erased 45 percent of the 40 percent gain it made between early March and the June 11 peak.

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Financials, meanwhile, were the worst performers, down 6.2 percent, as investors bought into the relative safe havens of telecom and utilities. Emerging market debt sold off while U.S. Treasurys rallied. The bench mark 10-year yield slipped to 3.691 percent.

Symptomatic of a market looking for a sell off, a variety of reasons were mentioned by traders. For the first time since the tension started in Iran more than a week ago, several stock traders pointed to geopolitical concerns as a reason to take profits in stocks. They pointed to the unrest in Iran, threats from North Korea, as well as violence in the Niger Delta as a potpourri of reasons to be fearful. Oil, meanwhile, is more vulnerable to Iran and it has been giving up its gains.

"You can get a bucket and fill it with reasons for today. It's kind of a grab bag effect," said Tim Smalls of Execution LLC. "We had a tremendous rally, and now it's just backing off, and there's nothing wrong with that. Prices are down, so you'll have people looking at it two ways -- the selling is on low volume and that's positive because nobody's really selling. On the flip side, you could say it's bearish. Prices are down and nobody's stepping up," he said.

Getting Technical

Stocks are now about 7 percent off their June highs.

Scott Redler, who follows the market's short term technical moves, said stocks broke their uptrend last week when the S&P 500 broke through 923/924. "Now's the time to look if there's real technical damage. It feels like this time, there's more technical damage that could bring a deeper retracement than we've had since the start of this move (In March)," Redler said. "Every other time, we had a shallow retracement."

From Fast Money

Your First Move For Tuesday June 23rd

Redler said 875 to 888 is an important area of support for the S&P 500. "That's the area we held and broke out from on May 4, and that should provide some short term support in the days ahead," he said. Redler said some areas of the market are getting oversold, and some traders will be looking for entry points.

"Short-term guys like me covered into today and are going to try to see what level the market can hold. I don't see any big moves happening to the upside. I think you could buy big dips and then you could be shorting rallies. There's going to be a lot of overhead resistance right now," he said.

What Else to Watch

President Obama holds a 12:30 p.m. news conference at the White House. He also plans to spend part of the day meeting Chile President Michelle Bachelet.

There are a few earnings of note, most importantly Oracle, which reports after the bell. Kroger reports ahead of the open, and Darden and Jabil Circuit report after the bell.

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Toyota [TM Loading... () ] holds its annual meeting in Japan. Shareholders are expected to approve Akio Toyoda, the founder's grandson as the new CEO, and Yoshi Anaba to a top position in the U.S. business.