Rising oil continues to trip up stocks, and the S&P 500 could take another run at the psychologically important 1300 level, while the situation shakes out.
The Dow tumbled 79 points, or 0.7 percent Monday to 12,090, and the S&P 500 fell 11 to 1310, but the market finished above its lows.
Oil rose $1.02 per barrel, and was as high as $106.95 before settling down to $105.44. Speculation and rumors continue to rule the oil market, with all types of stories making the rounds about Libya, its oil facilities and Muammar Gaddafi during a volatile trading day. Late in the day, the Financial Times reported that OPEC members are rushing to add output, in a quiet move by Kuwait, the UAE and Nigeria to ramp up production by as much as 300,000 barrels a day. Saudi Arabia is boosting output by 700,000.
There is little in the way of economic news Tuesday, and traders across markets are keeping a close watch on the Middle East and oil prices. The NFIB small business survey is released at 7:30 a.m., and the Treasury auctions $32 billion in 3-year notes.
"The market just keeps banging around based on things coming out of the Middle East," said Jefferies Treasury strategist John Spinello. Bond prices fell, and yields, which move inversely, edged higher but the market was tied like a tether to the stock market. The 10-year yield rose to 3.501 percent.
Spinello said the big auction is on Wednesday when the government auctions $21 billion in reopened 10-year notes, and yields could move higher Tuesday ahead of it. "I don't like any 10-year notes for trading purposes or even investment purchases, anywhere near 3.50. I think they'd have to come in at 3.60 or better," he said.
Stocks Mondaysaw buyers in the defensive utilities sector, and the selling was thickest in materials, off 1.8 percent and tech, down 1.4 percent. Consumer discretionary stocks also were under pressure.
"We had a very lengthy time of a nothing but a straight up market, so consolidation like this is long overdue," said Steve Massocca of Wedbush Securities.
"We're still pretty well up for the year," he said, noting the last pull back ran for most of the month of November. "This started on the 18th of February. Here we are on the seventh of March. If it's the equivalent of the last correction we had, it's got another week to run. We still haven't broken below that low we made on the 24th of February, of 1294 (on the S&P). The March second low of 1302, we challenged that."
Massocca said he expects the market to go lower, before higher. "First we need to break 1300, then we need to break 1294 to sort of be trading some new lows here. I think we're going to go sideways to slightly lower. I still think we get back to 1275. That would be a nice healthy correction and then we go back up," he said.
Oil is a wild card in the mix, as is the uncertain outlook for the Middle East, where violence has escalated in Libya and investors continue to be uneasy about Saudi Arabia. "$105 oil is not a vitamin pill for stocks, so I'm not surprised this is happening," he said of the stock market's volatility.
Strategas' Jason Trennert said he thinks the selling is temporary. "My own view is it is not a show stopper — oil prices and gasoline prices at the current levels and that's mainly because I think we're at the fat part of the curve as far as employment growth, profit growth and profit margins go. All these things are going to contribute to a much stronger economy this year," said Trennert.
"As it stands now, my own view is I am a buyer of stocks on weakness because I think the fundamentals are going to overwhelm higher oil prices we've seen in the short term," said Trennert.
Economists have been watching the surge in oil, with an eye to its potential impact on the economy. Goldman Sachs economists, in a report, noted they currently expect only moderate effects from oil prices on GDP. Impact is most likely to be felt later in 2011, and in 2012, they note.
Gasoline prices at the pump surged last week to a national average of $3.52 a gallon, the EIA said Monday. Thats a $0.33 gain in the past two weeks and the second biggest jump in a two week period ever.
"People have lost sight of this disruption (in Libya) is a little more than one percent of the oil market that's been disrupted, and there's more than adequate spare capacity around and inventories are high," said CERA Chairman Daniel Yergin.
"Cushing, Okla. (delivery point) is overflowing with oil. There's no shortage," he said. The White House, meanwhile, has been talking about using the strategic petroleum reserve to alleviate pressure on prices.
"It wouldn't relieve the pressure in the market because this is driven by momentum and uncertainty over what else would happen. Lack of clarity about Libya, uncertainty about what else could happen and a very obvious momentum," he said. Yergin said gasoline prices, topping $4 a gallon now in California, should not push much higher if the situation is contained in Libya.
"This is really a Southern European problem, and the companies there believe it can be efficiently managed," he said.
"This is a disruption, but it's less than hurricanes Katrina and Rita, when the supplies were very tight," he said of gasoline prices.
The 30th annual CERAWeek, a gathering of energy executives, oil ministers and government officials, is underway this week in Houston. CEOs from BP and Total will attend, as will the Alergian and Mexican oil ministers.
There is also a Bank of America investor day Tuesday, and Toyota was to make a major announcement overnight on steps it will take toward recovery. President Akio Toyoda is expected to lay out his vision.
Treasury Secretary Tim Geithner meets Tuesday with European Central Bank President Jean Claude Trichet in Europe. He will also meet outgoing German Bundesbank head Axel Weber in closed door meetings. - Follow me on Twitter @pattidomm.
Questions? Comments? Email us at firstname.lastname@example.org