Stocks could be put to the test Wednesday after the best two day gain in four months.
Markets will focus early on jobs news, provided by ADP and Challenger before the opening bell. The market views the ADP's private sector report almost as a warm up to the government's January employment report Friday, a highlight of trading this week.
The ISM non manufacturing survey is also reported at 10 a.m. and will be closely watched after the surprising jump in the ISM manufacturing survey earlier this week. Both contain clues to economic activity and possible job growth.
There is also a long list of companies reporting earnings, including Time Warner , Pfizer and Comcast , before the opening bell. Cisco and Visa release results after the market close.
The Dow Tuesday jumped another 111 points to 10,296, giving it a 2.3 percent gain so far this week. The S&P 500 rose 14, up 1.3 percent to 1103, within points of a significant resistance level. The best performers were health care and industrials, both up more than 1.9 percent. The laggards were materials, up just 0.4 percent and tech, up 0.8 percent.
Execution LLC's Tim Smalls said the S&P 500 faces a challenge as it moves in on the 1106 to 1112 level, and it needs a catalyst to push through. "I want to see it get through there convincingly before I get positive on this rally we've had for the last few days," he said.
In a break from recent patterns, stocks that reported better earnings news Tuesday moved higher, instead of in a "sell the news" fashion. Some of Tuesday's gainers were D.R. Horton , Whirlpool , Archer Daniels Midland , and News Corp , which reported after the bell. Ford also jumped after it reported a surprising gain of 35 percent in January vehicle sales.
Smalls said stocks could be repeating their trading pattern of the last earnings reporting period. "When Intel reported (in October), that was the peak of the market short term. It traded down for the next couple of weeks and at the tail end of earnings season, it started trading back up...I honestly think though that this market is more vulnerable to the downside," he said.
Risk assets found willing buyers Tuesday, as investors ran up the price of everything from gold and oil to wheat. Oil bubbled 3.8 percent higher to $77.23 per barrel on stronger economic data, a soft dollar and a sharp jump in gasoline futures. Gasoline on the NYMEX rose 4.4 percent to $2.0179 per gallon, amid news of a refinery fire in Canada. The dollar was weaker against the euro, even as investors continue to cast a wary eye on Greece's debt struggles.
Marc Chandler, chief currency strategist at Brown Brothers Harriman, said an important event for currencies Wednesday will come when the European Union weighs in on Greece's new financial plan. "They want to reduce the budget deficit from 13 percent of GDP to 3 percent of GDP," said Chandler. "As far as I know, that magnitude has never been done before, especially by a country that is still in recession and has an economy that is still contracting."
"The EU is going to give their spin. They're going to endorse it but they'll say there are more things needed...Then in the early part of the next week, there's going to be huge strikes in Greece. The social consequences of what makes the bond market happy are not going to bode well for Greece," he said. Greece could go to the IMF eventually, he said.
Chandler said the dollar was consolidating Tuesday, after recent gains. "The RBA (Australia) surprised us last night, but Thursday we've got Norway, Bank of England and the ECB (rate meetings), followed by Friday's jobs data. The big events of the week are ahead of us, so right now is the calm before the storm," he said.
Australia held rates steady Tuesday. Norway, one of three countries in tightening mode, is also expected to keep rates unchanged. The same is expected of the ECB and Bank of England.
Buyers drove Treasury prices higher Tuesday, even as pending home sales data was better than expected. The yield on the 10-year, as a result, fell to 3.637 percent, and the 2-year fell to 0.851 percent.
The belly of the curve -- 5 and 7-year notes - was the best performing, according to RBS' William O'Donnell, but he noted mortgage securities outperformed those durations.
O'Donnell, who heads rate strategy, voiced a concern that's been debated in the Treasury market for the past couple of months. That is the question of what will happen when the Fed withdraws quantitative easing in the form of mortgage purchases, at the end of March.
"There is no question the Fed has crowded out normal buyers of MBS (mortgage backed securities)..This is not my market, I'm a Treasury guy..I don't think you're going to get the cliff effect that everybody's afraid of," he said.
"You have to believe the overall level of rates will rise because you have somebody printing money and taking duration out of the market," he said. Many traders believe the Fed's exit from the market will result in higher rates, and some speculate the Fed will be forced to resume its program.
"This isn't a new story. It just seems to be getting more acute. It seems to be diminishing retail volume and this means the Fed is more dominant..The out performance of mortgages does mean that the belly of the Treasury curve, and the Treasury market as a whole is somewhat being held up while rates are being capped by the Fed and their purchases of MBS, at least in the short term. I think that's important. This could all change," he said.
The release of the federal budget this week has spurred more chatter in the Treasury market and elsewhere about whether Treasurys are a good investment in the face of the hundreds of billions needed each month to fund the government deficit. Moody's warned again Tuesday that the U.S. triple A credit rating could be in jeopardy longer term if the U.S. does not solve its deficit problems.
O'Donnell said he thinks the Treasury market could face problems when there is a recovery in private sector borrowing. "I see a total perfect storm that works to the detriment of Treasurys," he said. The Treasury now auctions $200 billion plus in notes and bonds a month and billions more in bills, and the market has easily absorbed the supply.
He provided an interesting chart that showed a sharp increase in government borrowing, against a steep decline in private sector borrowing. The combined domestic level of borrowing as of the third quarter was just a paltry 3 percent of GDP, including the government's jumbo share. That number, by the way, peaked in the late 1980s when borrowing briefly reached more than 30 percent of GDP.
What Else to Watch
President Obama meets at 10 a.m. with Senate Democrats. He also meets with a bipartisan group of governors.
Treasury Secretary Tim Geithner continues to speak on the federal budget, this time before the House Ways and Means Committee at 10 a.m.
Fed Gov. Kevin Warsh speaks on regulatory reform in New York at 1 p.m.
Other companies reporting Wednesday morning include Health Net, Honda, International Paper, ITT, Polo Ralph Lauren, Roche, United Micro and Black and Decker. Broadcom, Yum, Equity Residential, Monster Worldwide, Akamai, Fidelity National and CB Richard Ellis report after the close. American Express holds an investor call at 2:30 p.m.
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