Stocks & Investing - Wednesday Look Ahead: Rally Turns Two as Europe Sovereign Woes and Oil Combine to Test It - CNBC

Wall Street's bull enters its third year with a furrowed brow.

Tensions in the Middle East, and the resulting run up in oil prices, combined with seemingly unending worries around Europe's weakest sovereigns are powerful hurdles facing the young bull. But many analysts and traders think those problems are temporary, and the market can continue to climb on stronger economic news and earnings gains.

However, they are also watching the next series of obstacles, including how elected officials tackle the growing federal budget deficit. There is also the Fed's ultimate unwind of its easy money policies that have helped juice the stock market's gains. The Fed is due to end its quantitative easing program in June, and the risk then will be how stocks react in a rising rate environment.

The Dow Tuesday rose 124 points, or 1 percent to 12,214, while the S&P 500 was up 0.9 percent at 1321. The Nasdaq was 0.7 percent higher at 2765. Stocks were lifted along with bank shares, which surged about 2.8 percent after Bank of America said it hoped to raise its dividend and carry out share buybacks.

Tech stocks were late day movers and could weigh on Wednesday's market. Fiber optic component maker Finisar tumbled more than 30 percent after it issued a disappointing forecast and said China demand was slowing. That comment smacked other companies in the space, including high-flier JDS Uniphase, which lost 13 percent after the bell. Texas Instruments, in a less spectacular move, also lost ground in late trading afterit narrowed its guidance and said that demand for chips for televisions remains weak.

Baby Bull

Stocks two years ago Wednesday troughed as fear pervaded the markets and economy. The S&P 500 closed at 676 that day, well off its 2007 high of 1565, and blue chips traded at fractions of their current value. Since then the S&P has nearly doubled.

"I think it is interesting that on the two year anniversary, we've still got something on the list to perpetually worry about, and why you should be bearish," said James Paulsen, chief investment strategist at Wells Capital Management.

Oil is one of those worries. Bubbling crude prices have weighed on the stock market since rebellion erupted in Libya last month.Oil prices slipped slightly, falling below $105 per barrel as talk that OPEC would ramp up production to make up for Libya soothed markets. Meanwhile, the fighting in Libya continued and Muamaar Gaddafi's forces seemed to gain ground against the rebels.

"This is eluding me," said veteran trader Art Cashin of the stock market's rally Tuesday. "If they're not rioting in the streets, we go up, and if oil rallies, we go down."

Cashin, director of floor operations for UBS, said the two year anniversary of the market's bottoming is not particularly important as a milestone. "It's kind of like a 37th wedding anniversary. It's pleasant to remember, but doesn't have a great deal of impact."

Paulsen said the negativity from oil prices and Europe's woes will probably prove a positive for stocks, which had moved higher in an unchecked fashion for weeks. "I think if anything, I'm moving the other way. Here's what we've done. We've caused a little pause in this...We've marked some time and while we've bought some time, the fundamentals moved up again," he said.

Yet oil is a concern and the Middle East is an uncertainty. "We don't have a shortage of energy. What we've created is the fear of a shortage of energy," he said. Paulsen points out that rise in oil has paralleled a decline in some other commodities, like grains and copper, and that could help alleviate some inflation fears if oil doesn't continue to shoot higher.

Euro Zoned

The dollar reversed course Tuesday, moving higher against the euro and other currencies. The euro's weakness was particularly interesting, and it fell more than a half a percent to 1.3899 form above 1.40 earlier in the week.

"It's caught in a tug of war between interest rate expectations and the fear that the sovereign debt issues are coming back. It's hard to say butt we may be getting back to the days when we're trading off of issuance," said Boris Schlossberg of GFT Forex. The euro has been rising on interest rate expectations, particularly after ECB President Jean-Claude Trichet said a rate rise is possible but not certain in April.

Friday marks an important day for the euro zone as leaders meet for a summit where they are expected to agree to a "competitiveness pact," which Germany and France have pushed. The pact is seen as a minor step, and analysts have criticized it for failing to address such issues as debt restructuring.

What to Watch

There is not much economic news expected Wednesday. Wholesale trade for January is released at 10 a.m.

The Treasury auctions $21 billion in reopened 10 year notes at 1 p.m. Bond yields rose Tuesday, with the 10-year rising to 3.55 percent. Except for February, "this might prove one of the highest yield offerings since April or May of last year," said Ian Lyngen, senior Treasury strategist at CRT Capital. The 10-year was yielding 3.665 at February's auction.

Stocks & Investing - Tuesday Look Ahead: More Bumps Seen for Stocks - CNBC

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 Monday saw 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 [BP 48.15 -0.41 (-0.84%) ] and Total [TOT 60.79 -0.80 (-1.3%) ] will attend, as will the Alergian and Mexican oil ministers.

There is also a Bank of America investor day Tuesday, and Toyota [TM 89.02 -1.97 (-2.17%) ] 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.

Oil & Gas: OPEC Members Rush to Raise Oil Output - CNBC

Influential members of OPEC, the oil cartel, are joining Saudi Arabia in raising output to cool soaring prices and allay fears of a supply crunch in the west.

The behind-the-scenes move by Kuwait, the United Arab Emirates and Nigeria reflects growing unease among OPEC members over the threat to the global economic recovery from crude’s runaway rise amid the worsening crisis in Libya.

U.S. oil prices increased to their highest levels since September 2008 on Monday, trading at an intraday high of $106.95 a barrel [CLCV1 105.19 -0.25 (-0.24%) ], as Brent [LCOCV1 114.97 -0.07 (-0.06%) ], the European benchmark, hit a session high of $118.50. Gold jumped to a fresh record of $1,444 an ounce [XAU= 1432.60 1.86 (+0.13%)].

Industry officials said the production increase, expected by early April, would — together with an earlier rise by Saudi Arabia — almost make up the shortfall in supply from falling Libyan crude exports.

They said that Kuwait, the UAE and Nigeria were to ramp up their production by as much as 300,000 barrels a day in coming weeks. Riyadh has raised its output by about 700,000 b/d. The surge in output is the result of both a policy decision that reduces the need for an emergency OPEC meeting and oilfields coming back into production after maintenance.

The International Energy Agency, the western countries’ oil watchdog, estimates Libya’s oil production has fallen by about 1m b/d, down two-thirds from a prevailing output level of 1.58m b/d before the start of the crisis three weeks ago.

In Libya, troops loyal to Muammer Gaddafi battled with rebel forces outside the Ras Lanuf oil terminal and launched a number of air strikes on Monday, continuing a counter-offensive to prevent the rebels’ advance west.

Traders voiced fears that the fighting was turning into a civil war.

“The oil markets are pricing in an extended Libyan shutdown of crude exports,” said Michael Wittner, head of oil research at Société Générale.

The OPEC cartel, which controls 40 percent of global oil supplies, is divided about the need to increase output.

While Saudi Arabia has responded quickly by pumping more oil and some members are now quietly following, others including Iran and Algeria oppose an increase and see no shortage of oil in the market.

“OPEC is evaluating whether [it] needs to meet or not,” Qatar’s oil minister, Mohammed Saleh al-Sada, told reporters in Doha. The cartel has been debating in recent days whether to call an emergency meeting but has so far decided against it, officials said. Riyadh is pumping about 9.2m-9.3m b/d, after raising production by 700,000 b/d, according to a senior western oil official.

Other officials said Kuwait and the UAE were boosting output jointly by about 100,000-150,000 b/d in the next few weeks. Nigeria is set to add another 150,000-200,000 b/d in April with the return from maintenance of the Qua Iboe and Bonga oil fields, which produce high quality oil.

CNBC's Fast Money: Scary Chart: Bottom About to Fall Out of the Dollar? - CNBC

The Dollar Index, a trade-weighted benchmark of the greenback versus six other currencies, put in significant bottoms in early 2008, late 2009 and late 2010, forming a rock solid trend line that are exactly the kind of support that chart analysts look for in a bullish security.

But after a violent move lower this year, the index is threatening to break that trend line at the 76.20 on the index, alarming technical analysts everywhere.

A daily close below $76.20 “would signal a significant shift in sentiment is underway from bullish to bearish,” said George Davis, Chief technical Analyst at RBC Dominion Securities, in a special report to clients Monday. “This development would also produce a bearish medium to long-term trend reversal for the DXY [DXY Unavailable () ].”

The PowerShares DB U.S. Dollar Index Fund [UUP 21.96 0.025 (+0.11%) ], the ETF that tracks the index, uses futures to pit the dollar against the euro (largest component at 57.6 percent), the Japanese yen (13.6 percent), the British Pound (11.9 percent), the Canadian dollar (9.1 percent), the Swedish krona (4.2 percent) and the Swiss franc (3.6 percent).

The dollar is “hovering just above well-defined lows and toying with the prospects of a break below said lows,” wrote Carter Worth, Chief Market Technician at Oppenheimer Asset Management, in a note Monday. “Not good. SELL.”

So the technical analysts, who make buying and selling decisions based mostly on price movements, have trading floors thoroughly spooked. But what are the charts telling us about the fundamentals?

Last week, Federal Reserve Chairman Ben Bernanke reiterated his commitment to buying $600 billion in Treasurys to effectively keep the benchmark U.S. interest rate in essentially NEGATIVE territory.

That same week, European Central Bank President Jean-Claude Trichet shocked the market by saying a rate increase was possible next month. The Euro [EUR=X 1.3966 -0.0002 (-0.01%) ] hit a 4-month high versus the dollar today.

“Bernanke's testimony last week clinched the continued decline in the US dollar at the same time Trichet expressed what it means to be a prudent central banker,” said Peter Boockvar, equity strategist at Miller Tabak.

Boockvar and others believe that Bernanke is making the mistake of focusing on core inflation, which excludes food and energy costs because they historically have been very volatile. But at this moment in time, commodities have not been volatile, they’ve gone straight up. Brent crude oil crossed above $106 and silver hit a 30-year high on Monday. The ECB’s consumer price index comes out next week.

Interest rates determine currency fluctuations, as investment will flow into the countries with the highest rates of return. That reality has awakened some in Bernanke’s own circle. Dallas Fed President Richard Fisher Monday was among the most recent policy officials to signal that a completion of Bernanke’s full quantitative easing program may not be necessary.

The other reasons traders are fundamentally bearish on the dollar is its failure to act as a safe haven during the uprisings in the Middle East and North Africa. The DB PowerShares ETF (UUP) is down 2 percent over the last month as the events in Tunisia, Egypt and Libya began to unfold.

“The dollar not asserting itself during a period of turmoil in the Middle East is hugely worrisome,” said Scott Nations, President of NationsShares, a division of Fortress Trading. “Europe is going to raise rates before we do and China is already there. Both are bearish for the dollar. I'm watching this 22 level in the dollar ETF.”

Hedge funds are betting collectively against the dollar with the fervor of their currency trading legend George Soros. Figures from the CME, first reported by the Financial Times today, show that there is $39 billion net short the dollar, above the previous record of $36 billion in 2007 on the precipice of the financial crisis.

“We expect a bounce against our short position, but have no intention of making any adjustment on the first bounce as we believe there is significant downside potential in the dollar from current levels,” said Adam Grimes, director of tactical investments at Waverly Advisors, which sells its research to hedge funds. “In light of Trichet’s comments, expectations for a subsequent rate hike are now starting to get baked into the market.”

To be sure, several brave traders are using this level to get back into the dollar in a bet that it will continue to hold the line. They believe the ECB will raise rates too early, derailing their fragile recovery and causing a flight back to the safety of the dollar. And even some bears on the dollar don’t see what’s so scary about a falling currency.

“Why is a weak dollar so bad?” asks Michael Block, Chief Equities Strategist at Phoenix Partners Group. “It is a great boost for manufacturing and could be a great boost for U.S. industrials” selling their products overseas at cheaper prices.

The problem, this time, is that a plunging dollar could throw fuel on the rally in commodities priced in dollars. This will aggressively raise input costs for companies from General Mills [GIS 36.79 0.03 (+0.08%) ] to Walmart [WMT 52.02 -0.05 (-0.1%) ], hit U.S. consumers with higher gasoline prices and cause more social unrest in even more parts of the world.

“The dollar will plunge against most other currencies, which will send prices increasing at a much faster rate than what has been experienced recently,” said Peter Schiff, President of Euro Pacific Capital. “So if you think oil and food prices are rising fast now, you haven't seen anything yet.”

Tuesday Lookahead: More Protests In Egypt May Fuel Oil Rally - CNBC

Tuesday's "million" person march in Egypt could keep the heat on oil prices, which have gushed nearly 8 percent in two sessions.

Other financial markets Monday ignored the unrest in Egypt after reacting sharply Friday, as uncertainty increased ahead of the weekend and nervous traders repositioned.

So Goes January?

Stocks ended January on an up note, with the Dow up 2.7 percent for its best January since 1997. For those who believe the old adage, a good January foreshadows a good year for stocks.

The S&P 500 gained 2.3 percent, its best January since 2006 and the Nasdaq gained 1.8 percent, its best since 2007. The Dow Monday rose 68 to 11,891, and the S&P 500 rose 9 to 1286. The day's top sector was energy, up 2.5 percent on rising oil prices and Exxon Mobil's strong earnings report.

The dollar Monday was down 0.6 percent against the euro (1.3692) and was down more than 2.3 percent for the month. However, it gained more than 1 percent against the yen for the month and was barely changed Monday. Treasury prices declined Monday, driving rates higher. The 10-year was yielding 3.38 percent.

"I think it will be a better bid market" Tuesday, said Jefferies Treasury strategist John Spinello. "We have reasons to be better bid. No supply and the Fed buying for five days.

"I think with tomorrow's march (in Egypt), if things get a little unruly we'll be better bid. The street is of the mind set to be long to sell, rather than long for a long ride," he said.

Investors will also be watching ISM manufacturing data and construction spending at 10 a.m. Tuesday. Auto sales for January are released throughout the day, and there are a number of major earnings before the bell. BP [BP 47.47 1.26 (+2.73%) ], Pfizer [PFE 18.22 0.07 (+0.39%) ], UPS [UPS 71.62 0.89 (+1.26%) ], Biogen Idec, Archer Daniels Midland, McGraw-Hill and Cumminsreport. After the bell, Boston Scientific [BSX 6.98 -0.01 (-0.14%) ],Broadcom [BRCM 45.09 0.77 (+1.74%) ], Electronic Arts [ERTS 15.59 0.59 (+3.93%) ], and Aflac report.

Oil Drill

Nymex crude jumped about 3.2 percent Monday to $92.19 per barrel, its first close above $92 since October, 2008.

"Based on the technicals and having touched that number (92), it looks poised to go higher," said John Kilduff of Again Capital.

Paramount Options President Raymond Carbone said U.S. West Texas Intermediate crude, traded at Nymex was following Brent crude higher. Brent hit $100 Monday. "People were short the WTI and long Brent," he said, noting the spread is narrowing between the two as WTI moves higher. "It narrowed today, and it narrowed a couple of dollars Friday. It's the unwinding of a trade that was on anyway," he said.

He said oil could continue to move higher. "It doesn't look like there's going to be any sort of calm coming to the situation any time soon. It depends on the photos you see from that march. If it's nice and peaceful, it'll be one thing. If the tear gas is flying, it'll be another thing," he said.

Kilduff said oil got a boost Monday when the Egyptian military said it would not use force on the protesters. "That seems to bring a new level of uncertainty about what's going going on in terms of transition," he said. "Clearly of all the asset classes, oil is the most sensitive to this uncertainty."

Protesters have been calling for the resignation of long time President Hosni Mubarak in demonstrations that have gotten larger and move violent since they started last Tuesday. Mubarak Friday declared he remained in charge of the government and said he was firing his cabinet. His newly named vice president, Omar Suleiman said on state television Monday that he was asked to begin discussions with the opposition. Mohamed ElBaradei, former UN nuclear chief, has won the support of the Muslim Brotherhood and other opposition to represent their side.

"The reality is a lot of people see him (ElBaradei) as opportunistic. 'The guy didn't live here. He doesn't understand us.' He doesn't really represent that many Egyptians. He's got a seat at the table. He'll be part of any post Mubarak world, but I don't know how sustainable that would be," said Nomura's Ann Wyman, a Middle East and Africa expert who heads Emerging Markets Research, Europe.

Egypt is not a major oil producer, but traders said fear of contagion spreading to other oil producing countries in the region has helped spark the run in oil prices. Prices have also move higher on concerns the protesters could interfere with the Suez Canal or SUMED pipeline, which when combined carried a little more than 3 percent of the world's oil supply in 2009.

"Egypt is putting anxiety back into the oil price, and it will be there at least until there is clarity about a transition out of the current turmoil. The turmoil’s most immediate impact on the world oil market would come from Egypt’s role as a major transit point for Persian Gulf oil, via the Suez Canal and the SUMED pipeline. The larger anxiety is about the impact in the region that provides so much of the world’s oil," CERA chairman Dan Yergin wrote in a quick note.

Will there be a change in the region’s geostrategic balance, of which Egypt is a bulwark? The biggest concern, from the oil market point of view, is in terms of contagion. The entire Arab world is watching the events unfold in Egypt, and the outcome, whatever it will be, will resonate throughout the region—both for populations and for governments. Events will determine how high anxiety drives the price," he wrote.

Egypt's stock market has been closed and will likely remain closed for some time, Wyman said, noting that Tunisia's market has been closed since protesters toppled the government there.

She said a concern for that market is that much of the market's capitalization is from the banking industry, and banks have been closed during the protests. "While they claim to have a lot of liquidity like they did before the crisis started, you have to ask yourself what's going to happen when they reopen, and people start to trying to pull out deposits," she said.

"I think for now there is going to be hesitation to putting more money to work in Middle East markets. Right now, there is just discomfort with the whole region," she said. "Later, some differentiation will be made." Some of the markets that would be more attractive include Dubai, Kuwait, and Abu Dhabi.

"We are just reevaluating political risk across the whole region and how it shakes out. I just think that people want to stand back at a distance right now," she said.

Stock Market and Investing Next Week: Markets Watch Middle East, US Jobs Report - CNBC

Unrest in Egypt has replaced Europe's debt crisis as a flash point for markets, and any unfolding developments there will no doubt affect trading in the week ahead.

Clashes between protesters and authorities intensified Friday, as the government deployed the Army against civilians in the street for the first time in 25 years. The anti-government uprising caught the attention of financial markets in the fourth day of protests Friday, triggering a jump in oil prices and rush to safe-haven assets, like gold, Treasurys and the dollar.

The Dow fell 1.4 percent Friday to 11,823, in the same week it reached 12,000 for the first time in nearly three years.

For the week, the Dow was down 0.4 percent, its first weekly loss in two months, and the S&P 500 was down 0.6 percent to 1276. The S&P fell 1.8 percent Friday, its worse decline since Aug. 11. The Nasdaq, down just 2 points for the week, fell an outsized 2.5 percent, or 68 points Friday, to 2686, as tech stocks took a major hit. Many traders and analysts had been expecting a pull back in stocks, and some said this could be the start of a several percent sell off.

"We don't know what's going to happen, so there's near-term headline risk," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. "Top-tier economic data next week could shift market attention away from the Middle East if things don't escalate too much."

The January employment report, due Friday, is one of those things that will get attention. Economists expect about 135,000 non-farm payrolls were added in January. ISM manufacturing data and auto sales on Tuesday will also be important. European finance ministers meet at the end of the week, and Fed Chairman Ben Bernanke speaks at the National Press Club and takes questions from the media on Thursday.

There are also dozens of major earnings reports in the coming week, includingExxon Mobil [XOM 78.99 -0.89 (-1.11%) ], Archer Daniels [ADM 32.76 -0.67 (-2%) ] and Pfizer [PFE 18.15 -0.33 (-1.79%) ]. "My bias is to think the equity market will find its footing next week," said Barry Knapp, head of U.S. equities portfolio strategy at Barclays Capital.

"Geopolitical events tend to cause sharp reactions, then we forget about it for a few days," unless the situation escalates, he said.

Egyptian President Hosni Mubarak, after the Wall Street close Friday, announced that he was still in charge of the government but that he was dismissing his cabinet. He said the rioting and plundering was unjustified and pledged to take new steps toward democracy and to help the unemployed and poor.

Oil traders had been watching the situation all week for signs of increased instability or spill over into other parts of the Middle East. Demonstrations have also taken place this week in Yemen and Jordan. Nymex crude rose $3.70 per barrel, or 4.3 percent Friday to $89.34 per barrel.

Egypt is not a major oil producer. It produces less than a tenth of the output of Saudi Arabia. But the fact Egypt controls the Suez Canal sent jitters through the markets as traders speculated an uprising could result in closing of the canal, a major shipping artery and a minor thoroughfare for oil.

Knapp did say an unexpected event, like the Egyptian uprising, could conceivably trigger a stock market pull back, but he thinks it would be no more than 5 percent. "I think anything deeper would be unlikely. I don't think it would lead to a 10 percent correction..If there rumblings in Saudi Arabia, it would be a different situation," he said.

Knapp said while fourth quarter GDP, reported Friday at 3.2 percent, had some very strong components, the fact that it did not meet expectations was a disappointment. Economists had forecast 3.5 percent.

"There was a lot to like in the GDP report. The fact of the matter is the headline did miss expectations again. When you think of when that happened in late April or late July, it did coincide with a pretty good equity market correction," he said.

Therefore, the week's economic reports will be very important and will need to support the idea of an improving U.S. economy. Besides the jobs report Friday, ISM manufacturing data and construction spending are released Tuesday. Monthly auto sales also are reported Tuesday.

The ADP private sector employment report is released Wednesday, and weekly jobless claims are Thursday. Productivity and costs, ISM non-manufacturing and factory orders are reported Thursday. Chain stores release their monthly sales Thursday.

Dollar Dilemma

The dollar has been buckling under a rising euro lately, but that pattern reversed Friday. The dollar gained nearly a percent against the euro, but it lost about the same against the yen, as the Middle East fears sent speculators into long yen positions.

"There's a big flow into the safe havens, that would be Japanese yen, Swiss franc and the U.S. dollar," said Chandler. He pointed out that emerging market currencies were particularly hard hit against the dollar Friday. The Turkish lire was down 2 percent and the Israeli shekel was down 1.3 percent. Mexico's peso was also down more than 1 percent.

"This is one of the times that the dollar got stronger and gold got stronger," he said. Gold, which was at its lows of the year this week, bounced 1.7 percent Friday, to $1340.70 per ounce.

Earnings Central

Big oil is front and center this week, with Exxon reporting earnings Monday and BP [BP 46.21 -0.47 (-1.01%) ] on Tuesday. Illinois Toolworks, Gannett, Nustar, Checkpoint Software andRoper Industries report Monday. Anadarko reports after the bell Monday, as does Baidu.com [BIDU 106.54 -2.51 (-2.3%) ].

Tuesday's major reports include Pfizer, UPS [UPS 70.73 -2.18 (-2.99%) ], Archer Daniels, Biogen, Cummins, McGraw-Hill and Paccar. Aflac,Electronic Arts, Broadcom and Electronic Arts report after Tuesday's close.

On Wednesday, Nadaq OMX, Time Warner [TWX 31.72 -0.59 (-1.83%) ],Mattel, Whirlpool, Marathon Oil, Allergen and Hershey report in the morning. News Corp, Visa, Yum Brands [YUM 46.40 -1.19 (-2.5%) ] andTesoro report after Wednesday's bell.

Merck [MRK 33.07 -0.18 (-0.54%) ], Glaxo, Blackstone, MasterCard, CME Group, Moody's, Diamond Offshore, N.Y. Times, Viacom, Cigna, Kelloggand Starwood release results Thursday before the bell. After the bell reports include Coinstar, Las Vegas Sands and Sunoco.

Aetna, Constellation Energy, Aon, Clorox, Tyson Foods, Weyerhaeuser,Pulte Homes, Fortune Brands and Simon Properties report after on Friday.