Red sky in the morning.

When stocks are cued to run higher the morning after a big selloff, traders start to worry. What often happens is stocks rally at the bell and then see a sharp reversal. Anyone caught chasing stocks at the open is out of money.

So it's right to worry that the jump stocks take at the open will be nothing more than a big head fake. But the problem with this thesis is it assumes that yesterday's was a business-as-usual drop.

"Yesterday was not your normal kind of whack-'em-down day," said Bryan Piskorowski, market strategist at

Prudential Securities

. "Breadth was positive. Volume was strong."

It was not a matter of people getting out of stocks, but people moving out of the growth stocks that have found favor in the market for some time and going into areas that have languished. Over the last week, tech stocks have come in quite a bit while cyclical stocks -- papers, metals, chemicals -- have flown. It may be better to think of the action this morning as stocks reacting to a market rotation that got pretty violent rather than a market selloff.

Were there to be an extreme reaction, Internet stocks -- which in one day saw the kind of move that in normal stocks would be called a bear market -- would be indicated much higher, while cyclicals might see some profit-taking. That's not the case: The cyclicals are trading a bit higher on the thinly traded

Instinet

session, and Internets are up, but not by all that much.

"It looks like we're going to open with something of a bounce-back, but I don't think we're going to see these things off to the races," said Dan Mathisson, head stock trader at

D.E. Shaw Securities

.

After yesterday's action there are going to be a lot of fund managers wondering if this trend is going to continue, or if it's gotten a bit overdone. "They have to take a hard look at their portfolios and ask if it's time to change strategy here," said Piskorowski. "Today is going to be a very pivotal day where that's involved."

Mathisson thinks the trend will continue. "A lot of what's happened in the past week has been mean reversion," he said. "Now we're just returning more to historical norms." Given the way the

Nasdaq

stocks outperformed the

Dow

up to last week, he thinks there's room for more of that. "We could see the Nasdaq continue to go down relative to the Dow," he said.

At 9 a.m. EDT, the

S&P 500

futures were up 4.1, more than 8 above fair value and indicating strength at the open. The 30-year Treasury, where some people were parking money yesterday, was down 8/32 to 95 26/32, lifting the yield to 5.54%.

Though the major index masked the action, Japanese stocks had a tough day of it. The

Nikkei

added 22.9 to 16,697.11, but decliners outpaced advancers and tech stocks were hit badly: The

Jasdaq

fell 1.68, or 3.8%, to 42.55.

Even before New York started trading yesterday, people were saying today could be a bad day for Hong Kong's stock market, which looked like it needed to catch its breath after rocketing higher. The

Hang Seng

dropped 356.66, or 2.8%, to 12,409.78.

European markets were taking their lumps. In Germany, the

Dax

was off 74.39, or 1.4%, to 5145.76. In Paris, the

CAC

was down 92.12, or 2.2%, to 4287.22. And in London, the

FTSE

was down 174.4, or 2.7%, to 6340.9.

Tuesday's Wake-Up Watchlist

By

Brian Louis

Staff Reporter

  • Telecom Italia (TI) and Deutsche Telekom's (DT) - Get Report proposed marriage hit a snag last night, according to published reports. After a 10-hour meeting, Telecom Italia's board adjourned and said it would meet again today. The main difficulty appeared to be the control structure of the merged company, with Deutsche Telekom wanting a 56% stake, the Financial Times reported. The Wall Street Journal reported that despite the fact that Telecom Italia failed to endorse a merger, the companies stressed the merger proposal remains on track.
  • Chase (CMB) reported first-quarter operating earnings of $1.32 a share, beating the First Call 20-analyst estimate of $1.25.
  • Texas Instruments (TXN) - Get Report posted first-quarter operating earnings of 65 cents a share, beating the First Call 23-analyst estimate of 61 cents and up from the year-ago operating earnings of 44 cents.
  • EMC (EMC) reported first-quarter earnings of 41 cents a share, beating the First Call 16-analyst estimate of 40 cents and up from the year-ago 28 cents. In other news (earnings estimates from First Call):
  • American Home Products (AHP) reported first-quarter operating earnings of 49 cents a share, in line with the 24-analyst estimate.
  • Ameritech (AIT) - Get Report reported first-quarter earnings of 63 cents a share, excluding an item, beating the 12-analyst estimate by a penny and up from the year-ago 53 cents, excluding items.
  • Citigroup (C) - Get Report set a 3-for-2 stock split. Meanwhile, the Heard on the Street column in the Journal says that some analysts, while still enthusiastic about the stock's long-term prospects, say Citigroup's zooming shares -- the stock is up 40% this year -- are due for a pit stop.
  • Coca-Cola Enterprises (CCE) reported a loss of 15 cents a share in the first quarter, narrower than the 15-analyst projection of a loss of 16 cents, but worse than the year-ago loss of 13 cents.
  • E*Trade (EGRP) posted a second-quarter loss from continuing operations of 12 cents, narrower than the 10-analyst estimate of a loss of 17 cents a share.
  • Jon Corzine, co-chairman of Goldman Sachs, and John Meriwether of hedge fund Long Term Capital Management have been working together for several weeks to raise funds for a buyout of the hedge fund from the financial services consortium that rescued it last year, according to reports in The New York Times, the Financial Times, and Journal.
  • Honeywell (HON) - Get Report posted first-quarter earnings of 83 cents a share, 3 cents better than the 13-analyst estimate and up from the year-ago 75 cents.
  • Johnson & Johnson (JNJ) - Get Report posted first-quarter earnings of 82 cents a share, 2 cents ahead of the 24-analyst estimate and up from the year-ago 73 cents.
  • Merrill Lynch upgraded Northwest Airlines (NWAC) to near-term accumulate from near-term neutral.
  • SBC Communications (SBC) reported first-quarter earnings of 56 cents a share, in line with the 18-analyst estimate.
  • Schering-Plough (SGP) reported first-quarter earnings of 36 cents a share, in line with the 25-analyst estimate and up from the year-ago 30 cents.
  • Sprint (FON) reported first-quarter earnings of 93 cents a share, beating the 16-analyst consensus by 3 cents and up from the year-ago 80 cents.
  • Tenneco (TEN) - Get Report is selling its folding-carton business to Caraustar Industries. The unit includes five converting plants and five sales-and-technical-support centers and represents more than $100 million in annual sales, Tenneco said. Meanwhile, Tenneco, after intensive talks with rival automotive concerns over a possible sale of its auto-parts business, is now leaning toward separating its auto-parts and specialty-packaging businesses into two publicly traded companies, the Journal reported, citing people familiar with the situation said.
  • Tyco International (TYC) reported second-quarter operating earnings of 69 cents a share, beating the 13-analyst estimate of 65 cents and up from the year-ago operating earnings of 47 cents.
  • UAL (UAL) - Get Report, parent of United Airlines, posted first-quarter net income of $1.54 a fully distributed share, much better than the 11-analyst prediction of $1.39.
  • Merrill named U.S. Steel (X) - Get Report its Focus One stock of the week.
  • Wells Fargo (WFC) - Get Report posted first-quarter earnings of 53 cents a share, beating the 27-analyst estimate of 50 cents and up from the year-ago 41 cents.