Wednesday Look Ahead: Choppy Trading Expected as Volatility Returns

There's a whiff of volatility back in the markets, and that could mean a choppier trading environment for now.

Markets Tuesday again fretted about Greece's bailout package and concerns that similar problems will crop up in other European countries. Global stock markets tumbled, the euro fell below the psychological $1.30 level, and investors sought the safety of U.S. Treasurys. The VIX, the CBOE's volatility index, gained 18 percent to 23.84.

New York Stock Exchange (NYSE)
Oliver P. Quilla for CNBC.com
New York Stock Exchange (NYSE)

There was also heavy buying of puts as investors moved to protect stock market gains, and traders were already speculating where the "dip" buyers would jump in and support the market. The stock market has been driven higher by the view that the U.S. economy and earnings are rebounding, but it recently has increasingly sold off into worries.

On the worry list this week are sovereign debt issues, financial regulatory reform, the Gulf Coast oil spill, and Goldman Sachs . Add to that the failed Times Square terror bomb plot, which has become more of a concern, now that the suspect says he trained in Pakistan.

"I think we are in a 5 to 10 percent (stock market) pull back. It seemed like yesterday, everything was okay, and now it seems like we're going to get one up day for every two down days," said Jeff Kleintop, chief market strategist at LPL Financial.

The Dow was down 2 percent to 10,926, a decline of 225 points and its biggest one day fall since Feb. 4. The Nasdaq slumped nearly 3 percent to 2424, in its biggest decline since early February. The S&P 500 fell 2.4 percent to 1173, its lowest close since March 31.

"Yesterday the focus was 'now we're okay, we've got a plan (for Greece).' Now the focus is, 'can the plan be implemented?'" said Kleintop. He said the focus will again be on Greece Wednesday as a million workers take to the streets, striking to show opposition to Greece's austerity plan.

"The medicine is not much better than the illness. The impact of all these spending cuts, layoffs, tax hikes is going to mean slower economic growth..Just having a deal doesn't mean the problem is any better," he said.

Kleintop said Greece could stay a major focus until the plan passes the German parliament, in two votes May 7 and May 10. There is also a German regional election on Sunday.

Traders will also be watching the ADP private sector employment report, released at 8:15 a.m. Wednesday and the ISM non-manufacturing survey, at 10 a.m. Both will be analyzed for what they say about jobs ahead of Friday's April employment report.

There are also some key earnings, including Anheuser-BuschInBev, Time-Warner, Williams Cos, IntercontinentalExchange, Murphy Oil, Symantec, Calpine, Devon Energy, and Foster Wheeler.

Symbol
Price
 
Change
%Change
CPN
---
DVN
---
FWLT
---
ICE
---
MUR
---
SYMC
---
TWX
---
WMB
---


Euro Trashed

The euro finished the New York session at $1.3004 but was trading at $1.2965 late in the day, its first move below $1.30 since April, 2009. Rumors that much larger Spain would be the next country looking for a bailout weighed on the currency early in the session. Spanish Prime Minister Jose Luis Rodriguez Zapa called the rumor "complete madness."

"We cracked $1.30. We bounced a little off that. I think the key point here is going to be continued uncertainty in the euro zone until you actually see the Greek rescue package in operation," said Adam Boyton, currency strategist at Deutsche Bank.

"We had a big move today. It was on very little new information. I think ultimately the Greek rescue package will go through but the European policy will be critical," he said. Some analysts are expecting the euro to move toward the $1.20 level, but Boyton expects it to find its footing at about $1.2750.

"Once you start to see some stability in Greece, that will remove the market's concern about contagion. Contagion is a consequence of some uncertainty and once you remove that uncertainty contagion comes off as a driver of markets," he said.

Boyton noted the the Australian and Canadian dollars declined Tuesday. "This isn't just a European story today. It's a broader risk aversion...We've just had sovereign concerns but morphed into broader risk aversion," he said.

Buyers rushed to buy the 10-year Treasury, which caused a sharp narrowing of the curve as other investors scrambled to cover previous short positions on steepening trades.

The net effect was a compression of the curve to its narrowest since the second week of December. The 10-year yield moved from a high of about 3.71 in early morning trade to 3.60, well off its recent high of 4 percent.

As the dollar strengthened, oil and other commodities fell. The 19-commodity Reuters/Jefferies CRB index settled down more than 2 percent. Nymex crude slid 4 percent to $82.74 per barrel.
Buying Protection

Patrick Kernan, who trades S&P 500 options at the CBOE, said volume Tuesday was about 20 percent higher than recent levels. ".. of that, a lot of it was put buying," he said. "People are nervous now. I think they're just nervous given the gyrations we've had. We went up every day for three months," he said.

Jon Najarian of OptionsMonster Holdings said just 9 of the 40 largest trades in ETF options were in calls. Earlier, he said in a note that there were 51 trades of over 5,000 contracts in the ETF options at about midday, and only 17 percent of those were calls, the lowest level since March, 2009.

Kernan said the premium to buy out of the money puts in S&Ps versus selling out the money calls is the highest it's been since 2008.

"They're willing to pay more for insurance. They're willing to pay more to protect. I think it's relatively orderly as opposed to 2008, when it wasn't orderly at all and when people were panicking. People are just willing to pay more. The market has been up every day for three months. It just feels like the market is behaving a little more normally. We're having down days mixed in with the up days," Kernan said.

What to Watch

The demise of Bear Stearns will be discussed at the Financial Crisis Inquiry Commission when it interviews former Bear Stearns Chairman James Cayne and its former CEO Alan Schwartz. The hearing, focused on the "shadow banking system," starts at 9 a.m.

Traders are also focused on the weekend's New York City terror plot, uncovered after a Pakistan native's attempt to ignite a bomb in a parked car in Times Square failed. The man has been identified as Faisal Shahzad, 30. He had worked as a junior analyst for three years at Affinion Group, a marketing and consulting business in Norwalk, Conn., owned by Apollo Group. He left that job in June, 2009.

The debate about financial regulatory reform continues in the Senate. Goldman Sachs Chairman Lloyd Blankfein holds a conference call Wednesday afternoon with private wealth management clients.

Questions? Comments? Email us at marketinsider@cnbc.com