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Wed. Look Ahead: Can Jobs Shake Correction Conviction?

Like smoke from a far off chimney, a whiff of fear has crept back into the markets.

The financial sector was the one burned Tuesday, losing 5.3 percent in active trading amid a flurry of rumors of new problems at banks. Wall Street has been pumping up that sector, particularly a parade of lesser quality names, like Fannie Mae , Citigroup and AIG . Some of those ended the day as the biggest losers. AIG was down 20 percent and Fannie Mae, 17.6 percent.

Sharon Lorimer

Stocks fell despite strong economic news that showed a rise in manufacturing activity to more normal levels for the first time since the start of the recession. The Institute of Supply Management manufacturing survey came in at a surprisingly strong 52.9, its first time above 50 in 19 months.

The Dow though tumbled nearly 2 percent, or 185 to 9,310, and the S&P fell 2.2 percent, or 22 points, to 998. At the same time, oil and other commodities sold off, and the dollar strengthened against a basket of currencies. Treasurys moved higher, though the long bond lacked for buyers.

On Wednesday, investors are watching the ADP private employment survey, a kind of preview to the government's monthly jobs report Friday. There is also productivity and costs at 8:30 am New York time and factory orders at 10 am. The minutes of the Fed's last minute are released at 2 pm.

September Chill?

The stock market's selloff comes with many strategists and traders expecting a pullback. And to some, the timing was right with the start of September, a month that traditionally cools down stock performance.

"Today is September 1, so I think a lot of people are hyped about it, but technical rules work only until they don't," said Richard Bernstein, CEO of Richard Bernstein Capital Markets.

The financial sector was by far Tuesday's worst performer, followed by the commodities-related materials sector, off 2.7 percent. Traders said rumors abounded about the banks, including about new bank losses.

"The growth potential in a lot of these (financial) companies is going to be at a secular low, and I think personally, the ones that have been labeled too big to fail, their growth patterns are going to move closer and closer to regulated utilities. That's the reality. The government's not going to let them run wild and risk taxpayer money," said Bernstein.

One stock in the thick of speculation was Wells Fargo , which was rumored to be considering a secondary share offering. Late in the day, Wells said it had no intention of issuing new equityand that it was hoping to pay back the government's $25 billion in TARP funds soon.

Looking for Excuses to Sell

Traders were highly skeptical of rumors about a possible big bank failure either in the U.S. or Europe, but nonetheless the talk spread like wildfire in a market looking for a reason to sell.

"I wouldn't believe it for a minute," one trader said. "People are happy to see the selling. We'll see what they do overseas. It's those markets that have been leading the charge lately."

In the bond market, the 10-year gained 7/32, lowering its yield to 3.377 percent. The two-year saw its yield slip to 0.913 percent.

"The front end saw a bit of flight to quality bid. Everybody's talking about the seasonality of September as a negative (for stocks), and it's coming to fruition right now, said John Spinello, Treasury bond strategist at Jefferies.

The dollar rose 0.8 percent against the euro, to $1.4218 per euro. The greenback slipped against the yen to 92.87.

"I think there's probably a bit of good news fatigue. The ISM was a very strong printing at 52.9. I think for a long period of time, I would say the last three to six months, people have been looking at what's happening in the equities market and saying the market's pricing too strong a recovery, yet the data kept surprising on the upside. I hate to say this, but it's one day's move so I'm not going to get too excited," said Adam Boyton, currency strategist with Deutsche Bank.

Boyton said the foreign exchange market is focused on the August jobs report Friday morning. He said with the ISM so strong, it's possible the jobs number could bring a positive surprise. If so, he would look for the dollar to move higher against the yen.

Is ISM Really Bullish?

Miller Tabak's Dan Greenhaus pointed out in a note Tuesday that an ISM above 50 doesn't always mean good things for stocks. In the recession of 2002, the ISM broke above 50 in February, and stayed there until October of that year. During that time, the S&P declined nearly 30 percent, he points out. On the day the ISM was released in February, 2002, the S&P gained 2.2 percent.

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 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.