With stocks back in record terrain for the first time in 2014, traders are watching earnings reports and the Fed for next moves as markets continue to realign in new year trading.
Stocks rallied for a second day Wednesday, shrugging off Monday's steep selloff. The S&P 500 set a new high and closed at a record 1,848, up 9, while the Dow was up 108 at 16,481. The Nasdaq, up 31 to 4,214, set a new 13-year high.
"If you said sell it, you got killed every day but Monday for the last six months," said Patrick Boyle, a trader at BTIG. "Everybody's talking like it seemed a little toppy, and Monday's pullback was healthy."
Investors short 10-year notes
Stocks lifted Wednesday as traders viewed a surprise jump in the New York Fed regional manufacturing survey as a sign the economy is strengthening in the face of last Friday's weak jobs report. The Philadelphia Fed survey, due Thursday at 10 a.m., could be key.
"Monday's move scared a lot of people," Boyle said. "I think it's wait-and-see for the next four or five days. I think that's going to set up the quarter."
in one of his final weeks on the job, Fed Chairman Ben Bernanke appears at the Brookings Institution Thursday at 11:10 a.m. ET, discussing challenges facing central banks following the Great Recession and taking questions from the audience. San Francisco Fed President John Williams speaks earlier, at 9:15 a.m., on monetary policy when rates are at zero.
Earnings are also expected from Charles Schwab, PNC Financial, BB&T and Huntington Bancshares, as well as UnitedHealth, in the morning. Intel reports after the close. Best Buy reports on its holiday sales before the bell.
CPI consumer inflation data and jobless claims are at 8:30 a.m., and Treasury international capital flow data at 9 a.m. The National Association of Home Builders survey is reported at 10 a.m.
Treasury Secretary Jack Lew will be at the Council on Foreign Relations, speaking at 8:30 a.m. on the economy, the next steps for financial reform and his department's international agenda.
But traders are looking ahead at earnings as a key for the stock market, and that is what could steer a market that would do nothing but rise at the end of last year.
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"It's going to be really difficult to get a read this earnings season, especially since the financial sector is masking a lot of trends," said Gina Martin Adams, institutional equities strategist with Wells Fargo Securities. Earnings for the sector are expected to rise 21 percent, and she noted that insurers should make easy comparisons because of the impact of Hurricane Sandy on last year's quarter.
"It's our expectation that earnings will recover this year," she said. "I'd like to see the corporate- spending sensitive areas—tech and industrials—pick up the ball from what's been a consumer- centric recovery so far.
"I'd like to hear that in the commentary that it's about to get started. So far, it's yet to be seen," Adams said.
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Earnings for the S&P 500 are expected to grow about 7 percent in the fourth quarter.
"The trouble is balancing what could be a relatively dicey fourth quarter with, hopefully, some commentary that supports a better future," Adams said. "I think companies will be challenged to confirm analysts' perceptions."
Northern Trust, meanwhile, released its quarterly survey of about 100 investment managers, which showed them increasingly optimistic on the economy. The managers are also more optimistic about earnings—with 64 percent expecting to see higher earnings over the next three months, compared with just 49 percent in the third-quarter survey. The December survey also found that a majority (64 percent) expect market volatility, as measured by the VIX, to increase over the next year, and 69 percent expect interest rates to rise while the Fed begins to taper its QE program.
As stocks rallied Wednesday, Treasury prices pulled back and yields rose. The yield on the 10-year note edged up to 2.88 percent.
Bond investors are the most short duration relative to their benchmark that they've been since 2008, according to the Stone & McCarthy money manager survey.
As the Fed moved toward tapering its quantitative easing bond purchases, the street became increasingly short Treasurys. So investors are basically betting against another negative data surprise, such as the December jobs report, or that the Fed's could choose not to further wind down QE—either of which would cause rates to fall.
"That is the inevitable pain trade that this is revealing.In more generic terms, there are other things out there that supports this," said David Ader, chief Treasury strategist at CRT Capital. "The commitment of traders for example is also very short, especially in the 10-year sector."
Ader said even with the Fed tapering its purchases of Treasurys and mortgages, the former could become attractive and see a resurgence of buying interest from investors who have been focused on more richly priced spread products.
The Fed is paring back $10 billion in purchases this month and making purchases at the rate of $75 billion. It meets again at the end of the month and is widely expected to pare the program further.
"Historically speaking, Stone and McCarthy has been a reliable contrarian indicator," Ader said. "We like it when you have a confluence of supporting information."
Ader said many of the money managers who are short Treasurys are actually long corporates and could be attracted to Treasurys as yields become more attractive in a higher range.
—By CNBC's Patti Domm. Follow her on Twitter @pattidomm.