Gripped by fear, the stock market once more headed into the correction zone on the eve of the fourth-quarter earnings reporting season.
Tuesday's fierce selloff pushed both the S&P 500 and Dow down 11 percent from the highs they set in October. Ten percent makes a correction, and it is the third time the Dow has gone into correction territory in the last seven months if you count intraday moves. The Nasdaq is down more than 10 percent in the last eight sessions.
Two groups were the biggest losers in Tuesday's market -- financials and telecoms. The S&P financial sector was off 3.2 percent and the telecom sector tumbled a steep 4.8 percent.
But it was a meltdown in financial shares that started the selling spree, and the key culprit was mortgage lender Countrywide . Countrywide was down nearly 30 percent despite the fact it denied rumors that it is planning to file for bankruptcy. An analyst from Egan Jones issued a report that said Countrywide is severely challenged and "might falter if it does not receive an infusion of at least $4 billion" within the next couple of weeks.
The New York Times reported Tuesday that court records showing Countrywide fabricated documents related to the bankruptcy case of a Pennsylvania homeowner raise new questions about the company's business practices. That story pressured the stock even before rumors started to fly about a possible Countrywide bankruptcy.
The financial group was already jittery as traders look ahead to the fourth quarter earnings season, which starts Wednesday with a report from Dow component Alcoa . But next week, big banks Citigroup , Wells Fargo and J.P. Morgan all report, as does Merrill Lynch .
"One of the things right on the horizon is next week financial stocks begin their fourth quarter reports, and our guess is it's going to be ugly with new iterations of losses there," said Phil Dow, equity strategist for RBC Dain Rauscher. "I think investors ought to cool their heels until the quarter's reported, get the financial guide posts and figure out what to do next."
Dow, who appeared on "Closing Bell," also cautioned that investors should currently hold 20 percent of their equity portfolio in cash for the time being.
Telecoms took a thrashing after AT&T spooked not only the telecom sector, but the market when its CEO Randall Stephenson told a Citigroup investor conference that the telecom company sees some slowdown in its consumer business segments.
The idea of the consumer slowdown was enough to unhinge the already anxious stock market, particularly as investors look ahead with some concern to December chain store sales, due out Thursday.
Chris Johnson appeared on Closing Bell along with Dow. Johnson, chief investment officer and CEO of Johnson Research, said the earnings season will be key and could set the tone for stocks.
"We need to watch this earnings cycle..We need to watch this very closely," he said. "Investors are looking for a an important catalyst right now. They want to be very bullish. There's been a lot of optimism towards this market. Basically, they're hanging on by their finger tips on the ledge right now, looking for a reason to hold stocks."
"I think we see this corrective phase move into something more treacherous if they don't get that reason with this earnings season," he said. "I think we see this corrective phase move into something more treacherous -- that starts with a "B" and ends with and "E-A-R."
Wednesday Look Ahead
Wednesday is light on economic data. Energy inventory data is released at 10:30 a.m. St. Louis Fed President William Poole speaks Wednesday on subprime mortgages in St. Louis at 9:30 a.m.
Investors will also have the results of the New Hampshire presidential primary to consider.
The Consumer Electronic Show in Las Vegas continues, and J.P. Morgan's health care conference is also underway in San Francisco.
By the Numbers
As stock investors felt the pain, gold investors were counting their gains again on Tuesday. The precious metal had its third record close of the year, finishing at $878 an ounce, up 2.1 percent. Oil gained $1.24 per barrel to $96.33 on new tensions in Nigeria. The dollar fell slightly against the euro and yen.
The S&P 500 fell 1.8 percent Tuesday, to its lowest close since March 16, 2007. Here's an unhappy fact - the S&P has had its worst five day start to a year in the history of the index, according to Reuters.
Yes, that's right. The worst ever. If you believe these sorts of things, you might think that's a bad omen for the year ahead.
The Dow fell 1.9 percent or 238 points Tuesday, reaching its lowest level since April. If you looked back 12 months, the Dow is up 1.4 percent.
Fed Up!
Just when the market was getting used to the idea that the Fed could cut its target Fed funds rate by as much as half a point at the end of January, minutes from the Fed's last discount rate meeting were released Tuesday afternoon, showing discord among Fed members.
Three members voted to request a more aggressive, 1/2 point cut in the discount rate to help the economy. Seven banks sought a quarter point cut, the cut the Fed ultimately made. But two banks sought to keep the rate unchanged. Frazzled investors saw this report as a negative when it was released at 2 p.m.
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