Wednesday Look Ahead: Stocks Could be Hitting Speed Bump

One day does not a market make, but stocks may have hit a temporary rough patch.

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"We've gotten to the point where we have a neutral view through year end," said Citigroup chief U.S. equities strategist Tobias Levkovich. "As we get better clarity going into 2011, the market will probably rally into that."

Stocks Tuesday lost about 1.5 percent in the worst drop since mid August. The Dow was down 165 points at 10,978, and the S&P 500 was down 18 at 1165.

Levkovich said in a telephone interview that he made the call the market was peaking on Friday. "We hit our target. That was one of the points. Our 1175 (on the S&P 500) was hit last week," he said, after Tuesday's rocky market day.

Stocks started out weaker Tuesday, in part on disappointing tech earnings, but they also fell as the dollar rallied nearly 2 percent. The dollar got a lift from comments made Monday by U.S. Treasury Secretary Tim Geithner, who said the U.S. does not intend to devalue the dollar. As if in tandem, China raised rates ahead of the Wall Street open for the first time since the financial crisis began, propelling the dollar even further.

Stocks took another leg down in afternoon trading, after reports the New York Fed and two major asset managers, PIMCO and BlackRock were pressuring Bank of America to buy back $47 million in mortgages. The report renewed worries that the major banks could face new liabilities from the mortgage crisis as investors push back on bad loans.

Wednesday's market will be looking forward to another long list of earnings reports. Financials will be in the spotlight, with Morgan Stanley, Wells Fargo, US Bancorpand BlackRock reporting. Boeing, United Technologies,Abbott Labs, Altria, Delta Airlines, Genzyme, US Airways, St. Jude Medicaland Altria also release results in the morning.eBay, Netflix, ETrade and Seagate all report after the closing bell.

The Fed releases its beige book on the economy at 2 p.m. Wednesday.

Stocks could remain under pressure. "I think this (sell off) is healthy. I don't see us going a whole lot lower, but I don't think we're going to come out of this right away," said Steve Massocca of Wedbush Securities.

"I think you're going to see some leveling off. We're still higher than we were six days ago. I think we could get back down to the 1150 area on the S and Ps and I'd probably be buying them there. I think at some point we have to go back and retest the April high," Massocca said.

The energy sector was the weakest performer Tuesday, down 2.4 percent as oil and other commodities sold off. The materials sector was second worst, down 2.3 percent. Financials were down 1.4 percent.

Barry Knapp, chief equities portfolio strategist at Barclay's, said he does not think the mortgage and foreclosure mess poses a systemic problem. The question of "put backs," or mortgage loans that financial institutions could be asked to repurchase, will take years to sort out, as investors attempt to find misrepresentations or fraud. "You're looking more like at a 5 to 7-year period where these losses would be played out. For that reason it's unlikely to be a systemic market event. This is unlikely to be a problem for the credit part of the capital structure," he said. Knapp said, however, the mortgage concerns may continue to be a problem for bank stocks.

"I do think this is going to be one of those things that lingers," he said.

Knapp said the tech earnings disappointment were not unexpected. "I think the tech sector is a market performer at best, but at the same time those earnings are not reasons to be bearish on equities," he said. Knapp expects energy and industrial stocks to start looking better, and those earnings will be coming up after the financial sector winds down reporting.

He also expects the market to rally after the election. "The financial sector will just lag and we'll look to other drivers - the combination of QE (quantitative easing), the elections and the president acquiescing to a full extension of the Bush tax cuts.. That will be a positive for the market. Those things combined will push the market higher," he said. "The elections are two weeks away, and you're going to have a little bit of a gut check, and that's what's happening."

Dollar Dilemma

David Gilmore of Foreign Exchange Analytics said the currency markets, surprised by China's move, are now looking ahead to G-20 finance minister meetings at the end of the week in Korea. He said the Geithner comment and China move seem somehow coordinated ahead of the event. He noted that Geithner had not made a comment about the strong dollar policy since February, when he testified before a Senate panel.

"I think there's a lot of expectations about what G-20 could do and probably the most significant outcome would be some accord to stabilize the dollar. I don't think that's a realistic proposition. To do that, central bankers would have given up control over their policy to achieve that end," said Gilmore.

Gilmore said the dollar's move higher is temporary. "QE trumps everything else. At the end of the day, the dollar should resume its decline," he said.

Brazil's finance minister Guido Mantega welcomed China's surprise rate move, which increased the benchmark one-year interest rate on loans and deposits by a quarter of a percent. Mantega used the term "currency wars" recently, as he complained about the run up in the Brazilian real, as the U.S. weakened its currency and Japan attempted to drive down the yen.

China's move could allow it's currency to appreciate and alleviate some pressure on the real, he said.

Oil Drilled

Oil fell 2.3 percent to $83.08 per barrel, as commodities sold off Tuesday.

John Kilduff of Again Capital said oil moved on China's tightening move, and its recent gains were fragile.

"The energy complex has been pricing in nothing but global easing, and has been awaiting the next round of quantitative easing like the rest of the markets. The refining strike in France notwithstanding, oil inventories are robust," he wrote in a note. Kilduff also said the uncertainty over the impact of the mortgage mess is also an issue.

"It took a lot of belief and optimism to to reach the recent multi-month highs, but it only takes a little bit of disappointment to substantially set back the bull case for oil," he added.

What Else to Watch

Apple is expected to unveil its next Mac operating system, expected to be named Lion.

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