Stocks took a breather after an eight day run, but the bull isn't ready to give up yet.
The S&P 500 lost 2 points Monday to end at the psychologically important 1500 level, in its first decline in eight days. The Dow lost 14, to 13,881, its first drop in six days. The Nasdaq, meanwhile, closed higher, up 4 at 3154, as Apple gained more than 2 percent after last week's steep decline.
The 10-year Treasury yield pressed up through 2 percent Monday, for the first time since April, amid improving U.S. economic reports and the stock market's gains. But it backed down to the 1.96 percent level later in the session, and some strategists do not expect rates to keep rising much more even if the 10-year yield continues to flirt with the 2 percent level for now.
MacNeil Curry, Bank of America Merrill Lynch technical analyst, said the bond market's run up in yields could be soon coming to an end. He said the 10-year yield still has a ways to before it hits his upper target of 2.04 to 2.09 percent, but the five-year Treasury yield is close to his medium term target of 0.89 to 0.92 is close. The five year was yielding 0.86 percent late Monday, ahead of the Treasury's $35 billion auction of five-year notes Tuesday at 1 p.m. ET.
Even though he sees no signs of weakening in the S&P 500, he does think Treasurys and other global markets could be setting up for a turn and that could ultimately spill into stocks in the form of a short correction.
"I don't have anything that says we're poised for an imminent turn (in stocks). I still think we can trade up to a (S&P) 1520 to 1540 area. I wonder about what's going on in other markets and whether that's going to slip into a broader risk off," he said.
Overall, he said even with a bullish mode for risk, a pause looks likely. "I think we're setting up for a one month, two month, or three month correction. Then remember, things get powerful into the year end," he said.
He said there are multiple examples of what appears to be markets ready to turn. Euro/dollar, yields on Spanish and Italian bonds, emerging Asian currencies are all signaling, or close to signaling a turn. "It's a bit extended and I think we start to move into a seasonal soft spot. February is not really a great month. The risk is you could see a bit of a correction," said Curry. Starting with the euro, he noted it hit an early morning high of 1.3477 Monday, a level last seen in late February last year. "I think we're going to see a pullback down to 1.30," he said. But he expects the euro and risk markets to rise later in the year.
He also pointed to the Italian 10-year which hit a low yield of 4.018 percent this month, and was rising above that Monday. "We've tested these levels twice. There's been pretty good rejections," he said.
The Fed begins a two-day meeting Tuesday, and there is no news expected, despite chatter in the bond market that the Fed could display a more hawkish tone in its statement Wednesday. The speculation was circulating for the last several sessions. Rates did an about face and started rising after the minutes of the Fed's last meeting were released in early January, showing that several Fed members thought quantitative easing should end this year.
"I think what's happening is there's basically been a little bit of a risk on bid here, and it makes people happy not to be in Treasurys. This all started with the release of the minutes from the last meeting," said Ward McCarthy, chief financial economist at Jefferies. McCarthy said even overseas investors are uninterested in Treasurys, noting he was in Europe last week and investors from London to Spain were bearish on Treasurys.
But he doesn't expect the Fed to change its posture yet, and it will continue buying Treasurys and mortgage securities. "I think this Fed meeting is a complete nonevent," said McCarthy. "The description of the economy will be similar and I think that the important details of the policy statement will probably be identical. I don't think you should really expect any changes…the biggest question mark in my mind is will (Kansas City Fed President Esther) George dissent. I'm not really sure there's a whole lot that's different." George is a new voting member on the Federal Open Market Committee and is an outspoken hawk.
What Else to Watch
CNBC's Steve Liesman releases the details of his latest Fed survey of Wall Street economists, money managers and strategists on their Fed views, beginning at 7:30 a.m. ET on "Squawk Box" and CNBC.com. There is also some important data Tuesday, including S&P/Cash Shiller home prices at 9 a.m. and consumer confidence at 10 a.m.
Dozens of companies report earnings before the bell, including Ford, Lilly, Pfizer, EMC, JetBlue, International Paper, Danaher, DR Horton, Harley-Davidson, Illinois Tool Works, Harley-Davidson, Tupperware, AK Steel, Peabody Energy, T. Rowe Price, CIT Group, Corning, U.S. Steel and Valero. After the bell reports are expected from Amazon.com, Broadcom, Ryland, Ace Limited, Freescale Semiconductor and Boston Properties.
Higher interest rates sparked more market buzz about whether this is the year when bond investors will give up and move money to stocks. The phrase "great rotation" has appeared in a good number of headlines this month, but so far, it's not happening.
Jeff Kleintop, chief investment strategist at LPL Financial said the latest Lipper fund flows data again shows investors buying stocks, but they are buying foreign stocks and they are using money from money market funds, not bond funds.
"While we are also awaiting the rotation of investment flows from bonds into stocks, we think the latest speculation is premature and that the stock market rally may be due for a pause or a modest pullback," he wrote in a note Monday.
As the end of the month nears, it's also worth looking beyond Treasurys, at other areas of the fixed income markets that have seen big inflows. The iShares investment grade corporate bond ETF LQD is down 0.8 percent for January, while the SPDR Barclays high-yield bond fund JNK is up 1.6 percent. The S&P iShares S&P National municipal bond ETF MUB is up 0.8 percent for the month but was down nearly 0.5 percent Monday.
(Read More: Interest Rates Will Spike This Year: Soros)
Joel Levington, managing director of corporate credit at Brookfield Investment Management, said the spreads for investment grade debt have held in well but they have underperformed high yield bonds. "It's really a function of Treasury widening," he said. As for high yield, which has seen record prices, "you're in unchartered territory. What limits the downside is you're in a world that's hungry for yield."
Levington notes that there's one investment grade bond that hasn't been holding up well, and that is Dell, reported to be in talks on a leveraged buyout. He said the bonds have been selling off on concerns Dell's $9 billion of debt could be downgraded and become subordinated to new LBO debt.
He said the spread on the 2040 bond at the beginning of the year was 190 basis points to the long bond, and on Monday, it was 345 bps.