Market Insider: Thursday Look Ahead

Stocks are trapped in a volatile selling wave, driven by fears of the weakening global economy even as credit markets continue to show signs of improvement.

Traders say fund redemptions continued to ripple through the market Wednesday, and some buying activity was the result of short covering. Bargain hunters are in the market, but traders say they are not seeing huge new commitments.

Traders Thursday will be watching the weekly jobless claims report at 8:30 a.m. and another long list of major corporate earnings reports. Union Pacific, Altria, Bristol-Myers, UPS, Eli Lilly, Dow Chemical, TD Ameritrade and Starwood Hotels report ahead of the bell. Microsoft, Aflac and Burlington Northern report after the bell. (See more below.)


Two hearings on Capitol Hill Thursday will also be important to markets. Former Fed Chairman Alan Greenspan, SEC Chairman Christopher Cox and former Treasury Secretary John Snow testify before the House Oversight Committee on the financial crises and how it came about. At the Senate, the new czar of the bailout, Neel Kashkari testifies at the Senate Banking Committee on the market turmoil and regulatory response.

Market Mayhem

The Dow Wednesday sunk almost 700 points before recovering slightly to close at 8519, a decline of 514 points or 5.7 percent. The S&P 500 closed at 896, its lowest close in 5-1/2 years. The S&P declined 58 points or 6.1 percent. The Nasdaq also fell to a more than five year low, closing at 1615, a decline of 4.77 percent or 80 points. Traders point out that the futures came off their lows late in the day.

"The market's been in a pattern of indecision. You can see it in the past week and a half in the series of lower highs that traders are shorting and higher lows that traders are buying, thinking the bottom is in. We are coming into the apex, where the market is going to make an explosive move," said technical analyst Scott Redler of , that move could be in either direction, he said.

Tim Smalls, head of equities at Execution LLC, said the pattern of selling in the market Wednesday showed the impact of mutual fund redemptions which rolled in hourly. He said trends in Wednesday's market were also kicked off by the steep decline in Asian stocks Wednesday morning.

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"You've really got a perfect storm of things going on. You have commodities melting down. You have currencies with the most violent reversal we've seen in 20 years. On top of that, you've got a recessionary sentiment throughout the world, and you've got the biggest sectors in the Asian markets are technology and commodities. Both have been drilled. That set the stage there," Smalls said. "On top of that, next week is the end of the fiscal year in Japan....we've got domino after domino after domino."

He also said the markets have become increasingly concerned about the health of emerging market economies, like Argentina and Hungary.

"I do believe we've seen the bottom" in U.S. stocks, he said. "I think when we finally realize we're in trouble, we're coming out of trouble. We're not forward thinking here." He said he was looking at the intraday moves Oct. 10 in the Dow, to 7882, and S&P 500, at 838, as the lows.

Smalls said he thinks the wild volatility with triple digit daily swings though could continue and "probably will through the end of the year. We have had a major redistribution of assets," he said.

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  • As commodities tumble, and oil skidded well below $70 per barrel, the U.S. dollar continued to rally hearty against the euro. On Wednesday, it rose 1.82 percent against the euro. It finished at $1.2830 per euro, its highest close since Nov. 20, 2006. The dollar fell 2.56 percent against the yen.

    Libor, the bank to bank lending rate, continued to decline, cheering traders watching the credit markets. Buying in Treasurys resulted in the 10-year's yield falling to 3.618 percent, and the two year's yield fell to 1.548 percent.

    Jobs Data

    It may be anecdotal, but it's clear from daily corporate announces that the job losses are piling up. Look at Merck's plan to let go 7,200, announced with its earnings Wednesday. Moody's Chief Economist Mark Zandi said he expects the weekly jobless claims to come in at 475,000 Thursday.

    In a phone interview, he said that so far 3/4 of a million jobs have been lost since the beginning of the year. "It feels like, given the announcements, given the collapse of business confidence, we're not halfway done. At least 1.5 million to two million jobs will be cut in total," he said. Zandi expects unemployment to peak at 8 percent by the end of 2009 or early 2010.

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    Diane Swonk, chief economist at Mesirow Financial, said she sees unemployment peaking at 7.5 percent but she can see scenarios where it could even worsen to as high as 9 percent.

    "What's been really interesting is we never hired up in this cycle. We've been losing jobs all year," Swonk said. She said job losses in this downturn have not been as rapid as they usually have been in a recession.

    "What's unique about this situation today is how quickly the credit crunch reached Main Street in that three week period of complete and utter hell," said Swonk.

    "Credit in the past has always been a stabilizer in weak economic times. Now it's not there. It's an accelerator...This is really highly unusual how rapidly the economy is deteriorating right beneath our feet," he said..

    What Bull!

    I have to point out comments made public at the House Oversight committee Wednesday during its hearing about the role of ratings agencies in the financial crises.

    Two anonymous S&P officials were cited for exchanging this instant message about a mortgage backed security deal on in April, 2007:

    Official #1: Btw that deal is ridiculous.

    Official #2: I know right...model def does not capture half the risk.

    Official #1: We should not be rating it.

    Official #2: We rate every deal. It could be structured by cows and we would rate it.

    (Thanks to CNBC's Scott Cohn for this report from the committee.)

    Questions? Comments?