1st quarter ends, but stock volatility will not

Stocks look to end Q1 in the green
Stocks look to end Q1 in the green   

The broader market's first-quarter performance has been marked by wide swings and shallow gains, and the second quarter is likely to start off just as volatile with the upcoming earnings season a key.

Tuesday is the final day of the first quarter, and the S&P 500 at 2,086 is up 1.3 percent so far, with all but 0.1 percentage point of that gain made Monday. The Dow is 0.8 percent higher for the quarter, but small caps, techs and biotechs have outperformed, with the Russell 2000 and Nasdaq both up more than 4 percent.

The dramatic movers for the quarter were the dollar and oil—both blamed for slamming corporate profits and creating an earnings recession with the first profit decline in six years. The U.S. currency edged higher Monday, and the dollar index is up more than 8.5 percent for the quarter, while West Texas Intermediate crude futures are down about 9 percent.

A trader works on the floor of the New York Stock Exchange.
Adam Jeffery | CNBC
A trader works on the floor of the New York Stock Exchange.

Tuesday could be a busy day for markets. First, it's the deadline for a framework deal in the Iranian nuclear talks.

There is also some economic data—S&P/Case Shiller home prices at 9 a.m. ET; Chicago PMI at 9:45 a.m.; and consumer confidence at 10 a.m. Grain markets could also be volatile, as traders await key reports from the U.S. Department of Agriculture on quarterly grain stocks and spring plantings, expected at noon.

Equities could continue to trade on Tuesday around the themes that dominated the quarter. The health-care sector has been the best performer in the first quarter—up more than 7 percent. Traders dipped into utilities on Monday, the worst sector of the quarter. They also looked for bargains in the S&P energy sector, which is the second worst, down 3 percent, but up 2.1 percent Monday.

"You look at today and the headlines tell you that the market is trading better because the Fed is sounding more dovish and the People's Bank of China is sounding more dovish," said Julian Emanuel, U.S. equity and derivatives strategist at UBS. He also said the market was looking for a resolution on Greece and on Iran.

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Emanuel said the stock market should head into the second quarter riding the same sharp volatility that dominated in the first. But he said the earnings data could be what makes a difference, and the gloomy outlook could prove too negative. According to Thomson Reuters, analysts expect a 2.7 percent drop in first-quarter net income.

"I think you have to get far enough into the earnings season where people are comfortable with this," said Emanuel. "Today is just sort of the mirror image of the middle of last week. For us, if there are positive catalysts from Iran and Greece that could definitely move things toward the top of the range. Our thesis is this is a 'two steps forward, one step backward' type of market environment. You really need to see the earnings come in better than feared, and we think that happens by the end of April."

Emanuel said the two biggest issues affecting earnings—oil and currency—were factors for profits in the fourth quarter as well, and the reported impact was not that large. Traders have become increasingly concerned about negative earnings as economic growth for the first quarter continues to track slower and slower.

On Monday, economists pared back growth forecasts once more after consumption data. Goldman Sachs cut its first-quarter tracking growth forecast to just 0.8 percent.

Read MoreUS economy stalled in first quarter: Economists

Barclays chief U.S. economist, Michael Gapen, said his tracking forecast for first-quarter growth was now at 1 percent, and he expects an entire percent of his original 2.5 percent forecast to have been wiped out by winter weather. When trade data are released Thursday, economists are expecting another reduction in growth forecasts.

Stocks ignored the weakness, but bonds rose. The 10-year yield climbed slightly to 1.95 percent Monday. It started the year yielding 2.17 percent and fell as low as 1.63 percent in late January.

Read MoreJumping on junk: Investors crazy for high yield bonds

"The way the data has come in, it would be reasonable to suspect there's some further downside risk from the trade data. I think when the March data come in this should start to reverse," Gapen said. He and other economists expect a spring back in the second quarter.

But Emanuel said earnings should be more frost resistant than Wall Street's equity analysts expect.

"Last year's first quarter had the polar vortex, but yet earnings managed to be up 3 percent," he said. "Our view here is there are a few caveats ... but you just don't want to bet against the ability of corporations to produce earnings, and whether it's a function of share buybacks, which were very strong in the beginning of the first quarter, or surprises of one type or another, we think down 4 percent (for operating earnings) is likely a number that will be beat."

He said earnings growth does not have to come in positive for the market to bounce off better-than-expected reports.

Read MoreCramer: Weak earnings led to dud 1Q

As for oil, WTI futures for May closed down 0.4 percent at $48.68 per barrel on Monday.

If there's a nuclear deal between Iran, the U.S. and five other countries, the final accord would be expected by the end of June. Iran would then scale back uranium enrichment and other aspects of its nuclear program. In return, economic sanctions would be eased and that could free the way for more Iranian crude to make its way to world markets.

"If we have a deal, there's going to be considerable downward pressure on crude oil in my view," said John Kilduff of Again Capital. "They have a lot of oil in storage and in floating storage and that will hit the market in rapid fashion."

He said it would not take long for Iran to up its output by 200,000 to 300,000 barrels a day. He estimates Iran could add 300,000 to 500,000 in about six months, and eventually it could put a million barrels more on the market.

If there is no deal, Kilduff said there are doubts about the coalition's resolve to continue and Iran could get more oil onto the market regardless.

Grain markets could also be volatile Tuesday. The USDA is expected to release the first official planting estimates for 2015. Corn acreage is projected to shrink at the expense of soy beans and sorghum.