Choppy, thin trading will likely be the state of play in the coming week as traders await the important June jobs report Friday and fret about what the Federal Reserve might do.
Stocks start the second half of the year on a tentative note: The S&P 500's 12.6-percent gain in the first half was the best since 1998 but the index lost 1.5 percent for the month of June amid a volatile bond market and soaring interest rates.
Manufacturing data and jobs-related reports are the highlights of the U.S. economic calendar in the week ahead and investors will be keeping a close eye on interest rates.
(Read More: Will Second-Half Growth Justify Stock-Market Gains?)
"It's almost like we're in between tides. There's a period called slack tide. That's what next week is going to be like," said Art Hogan of Lazard Capital Markets. "We're right in between the tide moving in and the tide moving out, and we don't know what the next environment is going to be. Meanwhile, we're waiting for the most important economic report of the month."
Friday's employment report is crucial to trading in the next couple of weeks, since it is a key metric the Fed watches. The consensus is for 170,000 nonfarm payrolls in June, and the unemployment rate is seen dipping a tenth of a percentage point to 7.5 percent, according to Thomson Reuters. In May, the economy added 175,000 jobs.
Stocks closed out a skittish week with gains, as the bond market stabilized. The S&P 500 was 0.9 percent higher for the week at 1606, but it ended Friday on a sour note, with a loss of six points.
(Read More: Stocks Drop in June but Rally for the Quarter)
Bond yields topped out earlier in the week with the 10-year Treasury note, reaching a high of 2.66 percent, before moving back to a range around 2.50 percent. It was at 2.48 percent late Friday.
"It doesn't surprise me at all if we stabilize around 2.50, which is where I think insurance companies and pension funds would come in and scoop up coupon," said BlackRock senior managing director Peter Fisher, who is a member of BlackRock's Global Executive Committee.
Fisher said the trajectory of the 10-year yield will depend on the employment picture and if it improves enough, yields would start to move toward 3 percent between now and year end. "We could rally from here if we see a few weaker employment reports," said Fisher, speaking to the press on his mid-year outlook. He said employment reports will be key to rates.
According to Trim Tabs, investors pulled a record $61.7 billion from bond mutual funds and exchange-traded funds in the month of June, through June 24. Fisher said if the credit market stabilizes those type of flows should not continue. There has been some expectation that investors will become more disillusioned when they open their second quarter broker statements.
(Read More: Why All the Bond Selling Hysteria Is Overdone)
"I think in the last month, we've become very focused on what happens in mid-July," Fisher said, adding that investors will discover the hit to their bond holdings after the Fourth of July holiday.
"They're going to talk to their broker about what to do. They're going to be caught between balancing income and volatility," he said. "I don' think we're going to see massive redemptions out, especially if the bond market is stabilizing at these levels for the next few weeks."
Rates bottomed in early May and then moved higher on improving data, but really ripped higher when Fed Chairman Ben Bernanke indicated after the Fed's last meeting that the Fed could begin to slow its $85 billion in monthly bond purchases before the end of the year and complete the program by the middle of next year.
A flurry of Fed officials this past week were on the speaking circuit, and delivered a more consistent and seemingly more coordinated message to markets than usual. They re-emphasized that cutting back on bond purchases does not mean the Fed will be raising short-term interest rates any time soon. They also said that any plan to cut back on bond purchases would be made based on improvement in the economic data, and several said the markets have misread the Fed's message.
(Read More: Show of Force: Fed Officials Aim to Calm Markets)
"I don't think he miscommunicated," Fisher said of Bernanke. "I think they were overly ambitious with what they can do."
New York Fed President William Dudley speaks on regional and national economic conditions in Stamford, Conn. Tuesday at 12:30 p.m.
Besides U.S. data, markets will be watching China's PMI data and Japan's Tankan Survey. On Thursday, U.S. markets are closed for the Fourth of July, but both the Bank of England and European Central Bank meet Thursday.
Citigroup chief equity strategist Tobias Levovich expects the market to continue trading in a bumpy fashion. Levkovich's target for year end on the S&P 500 is 1615, so he does not see much upside immediately , but he sees the S&P above 1825 next year.
He said the market is dealing with the Fed's expected tapering of bond buying, which some investors fear will hurt market liquidity. There are also concerns that corporate earnings estimates, now reflecting gains of 10 to 11 percent for the second half, are too high and will have to come down. Levkovich said another problem is the slowdown in China and other emerging markets, and it's not clear how much impact their will be on companies and the world economy.
"It's really hard to argue for anything other than more volatility in the next three to six months. Historically, when the ISM is weak, like it has been for the past couple of months, three to six months later, industrials, materials and energy generally don't do that well," he said. The ISM manufacturing report is released Monday.
Levkovich said a lot of investors are moving to cyclical sectors, but he's concerned that is not the right move. "In order to get this transition to global cyclicals, you may need confidence on Europe, China, Brazil and Turkey," he said.
"This has not been a market about defensives and cyclicals. This has been a market about domestics and internationals. If you bought domestic cyclicals, any sector, they've all rallied hard," he said, pointing to retailers and transports for instance.
"I'm negative on consumer discretionary. I think the stocks have run too far," he said.
What to Watch
**Markets Closed Thursday for July 4 holiday
10:00 am Construction spending
10:00 am ISM Manufacturing
10:00 am Factory orders, May
07:00 am Mortgage Applications
08:15 am ADP, June
08:30 am Jobless Claims
08:30 am Trade Balance
10:00 am ISM nonmanufacturing
Markets closed for Independence Day
08:30 am Employment report