Market Insider: Friday Look Ahead

Some days, the bad news is just plain bad.

Senate's failure to reach an agreement on the auto bailout package looks set to drive markets lower Friday and that could most certainly mean a bankrupt General Motors. There is also economic news that is expected to ring in a negative tone before the bell. Retail sales for November are forecast to be down 2 percent when they are reported at 8:30 a.m.

Producer prices are expected to show a decline of 2 percent, at 8:30 a.m., and consumer sentiment, reported at 10 a.m., is expected to show a weak reading of 54. Business inventories are also reported at 10 a.m.

On Thursday, stocks were weaker out of the gate, but fluctuated throughout the day, before ending sharply lower. The Dow was off 196 points or 2.2 percent to 8565.

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Traders had a variety of reasons for the market weakness, but several pointed to weakness in the financial stocks, which lost 8.5 percent. Comments from US Bancorp , considered one of the better in its sector, added to the negative sentiment. The company said it would report charge offs of up to $650 million in the fourth quarter and build up reserves. It also said it expects non-performing assets to continue to rise and that it plans market-related write downs of $200 to $300 million due to credit losses for asset-backed commercial paper and mortgage-backed securities.

But traders also noted that the sell off came not long after JPMorgan Chase's well-regarded CEO Jamie Dimon said in an exclusive interview on CNBCthat the banking firm is having a "terrible" November and December. That hurt JPMorgan's stock and others. He also said real estate prices could continue to drop. "He gives you comfort in that he's transparent," said Robert Harrington, head equities trader at UBS. "You have to give him credit for going on, but at the same time he says the government has a lot of programs, is spending a lot of money, but we're in a recession."

"It was just an honest eye-opening that this will take time to work through," said Harrington of the interview. Dimon also said he was prepared for a tough 2009.

Harrington said the market had been buoyed by good news, including President-elect Barack Obama's stimulus comments earlier in the week and falling mortgage rates. But the market focused instead Thursday on the auto bailout and other negatives. "The bears have the ball and it's hard to fight them," he said.

Ahead of news that the auto bailout talks had collapsed, the dollar lost 2.3 percent falling to a seven-week low against the euro Thursday , in its third decline in four days. The dollar was at 1.3333 per euro. The dollar also fell nearly a percent against the yen, which was at 91.75 against the dollar .

The 10-year Treasury gained, lowering its yield to 2.648 percent. The two-year's yield fell to a record low 0.801 percent.

Earlier in the week, short term T-bills came to auction with a zero percent yield. Some even traded in the secondary market with a negative yield. GFT Forex director of research Boris Schlossberg said that day was a turning point for the dollar.

"Basically, everybody woke up and decided yield was more important than safety," he said. It didn't help that the head of Germany's Bundesbank Axel Weber Thursday also tried to dampen expectations the ECB would cut rates . ECB rates have never been lower than 2 percent.

"For the time being, the yield is in the euro and we're going to play it as long as it will last... $1.40 would be a stretch," he said. "The euro is getting money for one simple reason. It is the only G4 currency with a higher than 2 percent yield. Next week, U.S. rates could go as low as 25 basis points."

Brian Dolan, chief currency strategist at said that $1.345 is the next hurdle for the euro, and the zone of resistance is $1.36 per euro. Dolan said bad news, like a bankruptcy filing by an automaker or a big stock market sell off would turn the dollar around. "We need to see the stock market take another ugly fall in order of the dollar to get some of its safe haven status back. You basically don't want to see the dollar strengthen more than it is here," he said.

"A weaker dollar is not necessary bad. The data today shined a light on U.S. weakness," he said.

Of Friday's retail sales data, he said "we're bracing for a very weak reading and then a further onslaught against the dollar."

As the dollar fell, commodities rose. Gold, copper and most agricultural commodities gained. Oil, meanwhile was up a stunning 10 percent at $47.98 per barrel on OPEC comments calling for more severe cuts in crude production.

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Watch This Trend

Patrick Kernan of Cardinal Capital, who trades S&P 500 options, pointed out what he sees as a potentially interesting trend developing.

"We actually show a pretty good decrease in longer term volatility. just by the price of options -- one year and nine months. Basically we saw a lot of selling in those options throughout the entire day," he said. "It's either one of two things -- people just trying to sell options ahead of the holidays or people just fundamentally think the volatility we are seeing is going to be more of a shorter trend, instead of lasting deep into next year. It's probably a combination of both."

Kernan said this is not showing up in the CBOE's VIX (volatility index) yet, but it's become increasingly apparent in the S&P options pit this week.

For instance, on Thursday morning a December 2009 one-year straddle saw a dramatic price change. "The at-the-money December, 2009 straddle was at $308, meaning the S&Ps would have to move 308 points (by December 2009) But that straddle came down, 14 or 4.5 percent during the day. That is a very, very big move," he said.

Questions? Comments?