"Two weeks ago, the market was overheated. What the last week and a half did was a re-rack for the market, for those wanting to buy a dip," said Scott Redler, of T3Live.com. Redler said if the market can consolidate before moving back to the 1655 level, it could be heading into record territory again by July 4.
Analysts say that volatility has to do with a change in the way the bond market is viewed. Bond yields have been moving higher in anticipation of the Fed tapering off its purchases. In the week ending Wednesday, $9.1 billion in outflows hit bond funds, the second highest level since Lipper began compiling data in 1992.
"The thing we've identified as being the big switch here is this bond market volatility that's been introduced, and that's made the market more volatile. This has taken the stock market rally since the beginning of the year, and put it in perspective. I think that's going to be the hallmark of the second half of the year. It's the end of the 30-year bull market in bonds,"said John Canally, LPL Financial investment strategist and economist.
Canally said bond yield implied volatility, which has risen periodically through the financial crisis is elevated once more.
Goncalves, however, said yields could still move lower, if the economy weakens or stocks sell off sharply. "I still think the bond market overreacted to this thing. There's a very low appetite and no one really with strong appetite to buy. That's a sign of getting close to a top of a range. We've seen these yields around 2.20 for the past couple of weeks," he said. "If the BOJ doesn't disrupt the Japanese bond market and volatility calms down, I think Treasurys could rally a little bit after the auction,and then it matters how the market goes into the Fed meeting and how they communicate things."
Wells Fargo Advisors chief macro strategist Gary Thayer thinks Fed tapering comes later. "We think the fundamentals support the market where they are now. We don't think they're mispriced. I think the Fed is doing a good job. We'd be more concerned about Fed policy if the dollar were weakening and business and consumer confidence were going down," he said.
"One of the hurdles (for stocks) is we're moving into the summer season where there could be less liquidity and a little more volatility.That could be the challenge. The first part of the year when you have people investing for the year and flows are coming in. Over the summer time, we're not seeing a significant pullback but we could see volatility," he said.