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Wednesday Look Ahead: Oil Market is Barometer for Stocks

In the stock market, it's the oil traders who seem to be calling the shots now.

That was certainly the case Tuesday when the stock market shrugged off Fed Chairman Ben Bernanke and a blow-out ISM manufacturing report that showed the best activity since 2004.

The Dow tumbled 168 points, or 1.4 percent to 12,058, while the S&P 500 sunk 20, or 1.6 percent to 1306. A sharp rise in oil prices Tuesday choked off what traders thought would be an up day for stocks on the first day of the new month.

But worries that unrest is spreading around the Middle East, and particularly to Saudi Arabia, is causing jitters. On Tuesday, a report that Iran clamped down on anti-government protesters helped send oil higher in morning trading. West Texas Intermediate jumped to $99.63 per barrel, up $2.66 at the close. It continued to soar over $100 in after hours trading. Brent crude gained $3.62 to $115.42 on the ICE Futures exchange.

Another early report, later denied, had Saudi tanks entering Bahrain. "We were trading below $85 on fundamentals a couple weeks ago. Now we're trading above $100 because some Russian newspaper put out a bogus story about Saudi tanks in Bahrain. The long speculative position on NYMEX contracts is at a record high, and they're seeing any excuse to run this market higher, and it's just not justified," said Addison Armstrong of Tradition Energy.

"It's a very crowded trade on the long side, and it's getting overdone. I think the most important thing is if you are a bull, you want to see this market settle above $100 for a few days before it gets confirmed it's going to go higher," he said. Despite his skepticism, Armstrong said oil will probably continue higher. "I think it will hold. It's an old adage of trading. Sometimes you can't fight the tape, and that's where we are now."

What To Watch

Bernanke addresses Congress for a second day Wednesday after several hours of testimony on the economy before Senate Banking Tuesday. This time, he addresses the House Financial Services Committee, which traders expect to be a little less friendly to the Fed chairman than the Senate committee.

Bernanke stuck to his expected comments on quantitiative easing Tuesday and said so far that the run up in oil is not hurting the economy. However. sustained rises in oil or other commodites prices could be a threat "both to economic growth and overall price stability," he said.

The ADP private sector payroll report is released at 8:15 a.m. Wednesday and the Fed's beige book on the economy is released at 2 p.m. Economists expect ADP to show an increase of 170,000 jobs. ADP is a kind of barometer for the monthly jobs report but its track record has been spotty.

Warren Buffett will be a guest on CNBC's "Squawk Box" Wednesday, and he will be taking viewer questions.

Apple introduces its latest i-Pad at 1 p.m. ET event.

Whither Markets

Traders are now watching the S&P 500 to see if it can hold up after Tuesday's surprise sell off. "We closed on the lows. We took out two days of the three-day rally, and afterhours we were down another four or five handles. Tomorrow, we'll look to see if we can hold last Thursday's lows (1294) and hold the 50-day moving average (1292) on a short term basis," said Scott Redler of T3Live.com.

Redler said the 2.2 percent decline in financial stocks was also a drag Tuesday. There was a flurry of negative headlines around the group, including the latest insider trading black eye for Wall Street. Rajat Gupta, aprominent former Goldman Sachs director was charged by the SECwith leaking news of Warren Buffett's investment in the investment bank as well as earnings news on Goldman and Procter and Gamble to Galleon Group founder Raj Rajaratnam.

"It feels like this could be a little different in terms of some of the high fliers that didn't do well during last week's bounce, like Amazon , Netflix , Google and Baidu , as well as some of the cloud computing stocks," said Redler. "There are some signs that this correction has a litte bit of a further down move than just the low that was put in Thursday."

As stocks floundered, gold jumped to a record above $1,431 per ounce, and buyers moved into bonds in a flight-to-safety trade Tuesday. "It's just the drip, drip, drip of fear," said John Briggs, senior Treasury strategist at RBS. He said Bernanke said nothing new for markets but that traders had been watching the economic data and anticipating Friday's monthly jobs report, before the latest oil surge.

"It just feels like people began to get on the "growth is good" band wagon into the payrolls number, and are being squeezed out, and global concerns forced them to cover their shorts," he said.

The dollar firmed just slightly against the euro Tuesday. "Everything said and done, the euro is less than a cent away from the year's high of 138.64," said Brown Brothers Harriman chief currency strategist Marc Chandler.

"Thursday's ECB (European Central Bank) meeting and Friday's U.S. jobs data are two big things weighing on the dollar . People think the ECB, Bank of England and the rest of the world are raising interest rates. The higher oil prices in the current environment is dollar negative," said Chandler.

- Follow me on Twitter @pattidomm.

Questions? Comments? Email us at 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 Senior Commodities Correspondent and 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.