Market Insider: Thursday Look Ahead

Wall Street feels a little like a beach town bracing for a hurricane. Maybe it will hit. Maybe it won't. But the winds have picked up.

Thursday's markets will face JP Morgan earnings, producer inflation data, weekly jobless claims, and the current quarter's first economic headlines in the Philly Fed's report and the Empire state manufacturing survey. Europe's central bank decides on interest rates before the New York open, and Congress will vote on releasing TARP funds to aid the ailing banking sector.

Stocks had their worst day of the young year Wednesday and their biggest drop since Dec. 1. The Dow tumbled 248 points, or 2.94 percent to 8200. The S&P 500 slid 29 or 3.35 percent to 842, and the Nasdaq was down 56 percent or 3.7 percent to 1489. Banks once more led the decline, falling 5.7 percent, and investors fled to the safety of Treasury bonds.

"We started off getting a New Year's bounce. That has so far fizzled and what's starting to unfold is another wave of investors fleeing the markets," said Brian Dolan, chief currency strategist at "I'd be looking for another flight to the dollar and flight to U.S. Treasurys."

Dolan said the charts he watches show a sell signal for stocks. "I'm just seeing these pieces add up to what could happen here. There's nothing good coming down the pike so that's likely to mean another dollar safe haven bid and stock markets get hit," he said. Dolan expects the European Central Bank to cut rates by a half pointThursday, and ECB President Jean Claude Trichet is likely to voice openness to further cuts, a move that should boost the dollar against the euro.

Stocks in the News

After-the-bell news from Apple and on Bank of America could weigh on stocks in the morning. Apple said its founder and CEO Steve Jobs is taking medical leave until July. Just last week, Jobs assured investors his health was not a major concern and that his weight loss was from an easily treated hormonal imbalance. But he stepped aside Wednesday due to more complex health issues, leaving COO Tim Cook in charge amid questions about the company's succession planning and disclosure practices.

Apple fell sharply, but recovered some of its losses in late trading.

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Bank of America also slumped after the Wall Street Journal reported it was in talks to get billions more from the government to help with its acquisition of Merrill Lynch . The story, quoting sources, said discussions started in mid-December for the additional funding. Citigroup, also in the news, already took its second helping of government bailout funds. Citigroup shares were down more than 20 percent amid reports the banking company would sell assets to raise capital.

Citi announced a deal Tuesday to spin off its Smith Barney brokerage into a joint venture with Morgan Stanley . Citigroup Wednesday said it would speed up the release of its earnings by about a week, and now expects to release them Friday. It is also expected to clarify its plans to reshape the company that day.

Worries about the banking sector and its need for more capital have plagued stocks this week. Oppenheimer analyst Meredith Whitney, appearing on CNBC's "Closing Bell," said she thinks banks will be in trouble until 2010. Whitney has said the industry needs way more capital than its taken from the government so far, and they will sell some of their most attractive assets.

"Banks, at a minimum have to catch up on a reserve basis," she said. Whitney added banks have calculated the peak to trough in housing at too low a level and are planning for an U.S. unemployment rate that has already been surpassed.

"I think they can go lower before they go higher. That, I think, is a kind of way of saying I'd diversify out of financials here," Whitney said. JP Morgan is expected to report break even results Thursday but some analysts are expecting a loss. Traders say there are rumors of writedowns surrounding all bank stocks.

All of this focus on banks came as the appointment of Timothy Geithner as Treasury Secretary was delayed until after the inauguration. Senators are questioning his failure to pay self-employed taxes while working at the IMF. The uncertainty around Treasury Secretary, a key role in the government's financial rescue operations, is likely to add to the market's uncertainty if it is not resolved soon. The Senate Banking Committee will hold a heaing on other economic appointments Thursday, including Mary Schapiro for SEC chairwoman.

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Brown Brothers Harriman chief currency strategist Marc Chandler said he's watching the producer price data closely Thursday. "Tomorrow and Friday, our inflation numbers are going to be confirming that we're actually going to have deflation. There's going to be a negative reading year-over-year. It'll be the first time in the cycle. PPI will go negative by around one percent or so," said Chandler. CPI is reported Friday.

Chandler said the fourth quarter is expected to be dismal, with GDP a negative five or six percent. Many economists expect the fourth quarter to be the trough in the current recession. "Things are going to get worse before they get better," he said. He pointed out that the stock market has retraced half the gains made since Nov. 21 and the earnings period has just begun.

He said the Empire State manufacturing data and the Philadelphia Fed survey are of greater interest than usual. They are the first data that is measuring January and the start of the first quarter. Chandler said he is hoping to see some stabilizing in first-quarter data as it is released in the coming weeks. "It will still point to a horrific economy..but we need to see some data that shows moderating."

Chandler expects the dollar to continue its upward bias against the weakening euro and Eurozone economy. "I'm bullish on the dollar not because there's good things happening here," he said.

The dollar rose slightly against the euro to a level of $1.3160 per euro. The greenback was nearly flat against the yen. In the bond market, the yield on the 10-year slid to 2.215 percent while the two-year's yield slid to 0.722, its lowest level since Dec. 18.

Crude on the Nymex fell $0.50 per barrel Thursday, or 1.32 percent to $37.28 per barrel. Traders across the markets are watching the weakness in oil, which has continued to tumble on falling demand and has become the symbol for the weak global economy. The S&P energy sector was one of the worst performing stock groups, falling more than 4 percent Wednesday.

Whither Stocks

Patrick Kernan, who trades S&P 500 options, said investors should beware of the volatility around options expirations this week. "There was a lot of volatility buying right out of the gate," he said of Wednesday's trading. He said options investors were buying long dated options, for June, September and December. "They're positioning themselves for months of volatility, as opposed to weeks of volatility," he said. Kernan added that investors are also moving into the VIX, the CBOE volatility index, which traded above 50 Thursday.

Known as the market's fear gauge, the VIX finished at 49.14, up 13.6 percent, its highest level since December.

Earnings Central

Two important earnings reports come after the bell Thursday when Genentech and Intel report.

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