Markets Tuesday face the triple challenges of U.S. corporate earnings, Chinese economic reports and random headlines about Europe's sovereign debt crisis.
Early morning earnings reports are expected from Bank of America , Goldman Sachs , Coca-Cola, and Johnson and Johnson . IBM could also be a factor for the market Tuesday, weighing on the Dow after its nearly 4 percent after hours decline Monday.IBM said its profits rose 7 percent and it raised its 2011 outlook. But revenues were just shy of forecasts and it reported a disappointing number of signed service contracts, triggering profit taking in what has been a favorite stock setting an all-time high just last Friday.
There are a few U.S. economic reports Tuesday, including PPI producer-level inflation data at 8:30 a.m. ET, Treasury international capital flow data at 9 a.m., and the National Association of Home Builders sentiment survey at 10 a.m. Fed Chairman Ben Bernanke speaks at the Boston Fed's conference on the long-term effects of the "Great Recession" at 1:15 p.m. ET.
Chinese data Tuesday includes GDP, industrial production and retail sales. Nervousness about the pending reports added to falling commodities prices Monday. Oil was down slightly at $86.38 per barrel, and gold was down $6.30 per ounce at $1675.50.
The Dow Monday tumbled 247 points, or 2.1 percent to 11,397, and the S&P 500 slumped 23 points, or 1.9 percent to 1200. The rout in stocks started in Europe after a spokesperson for German Chancellor Angela Merkel and the country's finance minister made comments that signaled that investors may be overly confident in Europe's ability to resolve its crisis.
German Finance Minister Wolfgang Schaeuble, speaking of the Oct. 23 EU summit, said: "we won't have a definitive solution this weekend." Market expectations had been high for a bigger plan to solve the crisis in time for that meeting, based on comments from Merkel and French President Nicolas Sarkozy.
The euro lost 1 percent against the dollar, to 1.37.
"Reality is starting to hit people square in the face. They are realizing nothing's going to be solved because the European political situation is too complex to make a quick policy resolution," said Boris Schlossberg of GFT Forex. "What the market is starting to talk about is there's a massive divergence between the French and German bonds." Schlossberg said French yields have been widening against the bund, and there was a rumor in the markets Monday that France could lose its AAA rating. Later Monday, Moody's warned it was reviewing France's rating, and said it may give it a negative outlook if the costs for shoring up its banks and European bailouts are too high.
"I really do think we need very, very dramatic news from Europe and really strong data from China to allay the two big fears," he said. "...The two basic stories that are driving all risk assets right now are one - can European sovereign debt crisis be solved structurally? - and two - can global growth pick up into the end of the year, avoiding a slowdown or recession?"
Stocks had their worst day Monday since Oct. 3, when the market cratered, and the S&P 500 hit 1074, a level some strategists believe is the low for the year. Treasurys found buyers amid the stock sell off Monday, and the yield on the 10-year fell to 2.159 percent.
Since the Oct. 3 sell off, stocks have rocketed back amid expectations that European officials would structure a plan to help fortify bank balance sheets, and stop the spread of the sovereign crisis. Since then, the Dow is up nearly 7 percent and the S&P 500 is up 9.3 percent. In that time frame, the S&P energy sector led the way higher, with a 14.4 percent gain and the materials sector added 13.6 percent. Tech and consumer discretionary stocks are both up about 12 percent.
Cantor Fitzgerald strategist Marc Pado said consumer discretionary is a sector he watches closely, especially at this time of year and he was glad to see it outperforming in the last two weeks. "It's especially important in the fourth quarter because the fourth quarter is all about the consumer. Seventy percent of GDP is the consumer and most of what they spend, they spend in the fourth quarter," he said. "The last two weeks tells you that people thought the consumer was dead, and they were wrong. Now, it's a question of how alive are they" give the European situation and the dissatisfaction people have with the government.
Consumer staples - in a way a foil for discretionary stocks - were up 4.4 percent since Oct. 3 and they are up 3.9 percent for the year. Consumer discretionary stocks are up just 1.4 percent for the year- to-date, despite their recent surge. "The consumer staples have done very well because new money that's coming in that was very scared is now just marginally less scared," he said.
"That's why you hide in staples, it has less downside risk," Pado said. He regularly tracks the XLP, Consumer Staples Select SPDR ETF against the XLY, Consumer Discretionary Select Sector SPDR ETF. "...if we see the macro economy continue to improve, if we see Halloween sales strong, if we see a lot of feet on the ground at retailers during the Thanksgiving weekend, it's going to favor the discretionary side, not the staples side," he said.
Discretionary shares need to stay leaders if the market is going to advance into year end. "If they're not leading then the strength of the market is missing. If you're rallying on utilities, staples and food and tobacco, that's not a good thing," he said.
Stocks that miss or disappoint in any way are getting an extra dose of pain this earnings season in a nervous, volatile market. Wells Fargo shares were pummeled, down more than 8 percent after it reported earnings that missed some analysts estimates and as lending margins shrank and net interest income fell 5 percent. Traders had been expecting Wells Fargo to beat estimates.
VMWare was also down about 4 percent in after hours trading after its management warned 2012 would be more of a challenge with "growing macro uncertainty" leading to slower growth.
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