Anxious week ahead for markets
Traders are bracing for another rough ride in markets this week, as the emerging markets continue to shakeout and the Fed is expected to announce another round of cuts to its easing program.
There are also about a quarter of the S&P 500 companies reporting earnings, including Apple Monday, Boeing and Facebook Wednesday, and Exxon Mobil and Google Thursday.
Several major economic reports are also expected, starting with new home sales Monday and durable goods Tuesday, while the first look at fourth-quarter GDP is expected Thursday.
But the big event is the Fed meeting and how the markets will trade around that meeting after a week that saw fierce selling in emerging markets, a flight to quality into Treasurys and the worst weekly U.S. stock market performance in 19 months.
The Fed issues its post-meeting statement Wednesday afternoon and is widely expected to announce a second phase of tapering, with another $10 billion cut to its once $85 billion bond-buying program. The meeting is also the last to be chaired by Fed Chairman Ben Bernanke, who leaves Friday. Fed Vice Chair Janet Yellen will take over the role.
Mesirow Financial Chief Economist Diane Swonk expects the Fed to acknowledge the market shakeout.
(Read more: Dow falls 300 as investors fear correction)
"They're going to have to deal with the risk and also that the weather is clearly having an impact on the economy," she said. "That happens to be transitory, but they have to acknowledge that as well, and they're going to get a GDP number that looks spectacular on top of that," she said, adding that fourth-quarter growth could be 3.7 percent.
After two days of stock market declines, talk already centered on whether the market disruptions were enough to keep the Fed from continuing to slow its quantitative easing.
"It will be easy for a trader to say the Fed can flip on a dime. But if they flip, you have to worry about it," Swonk said.
The emerging market pain played out dramatically in the currency market, and analysts stressed that while activity around some countries, such as Turkey and Argentina, is specific, the entire emerging world was smeared by growth concerns after a report this past week showed manufacturing activity contracting in China.
(Read more: EM turmoil: exclamation on choppy 2014)
Turkey's lira fell to an all-time low Friday, and Argentina, which saw huge declines in the peso this past week, relaxed controls on dollar purchases Friday after its move to devalue the peso stirred fears of a financial crisis.
"I think this is one where the markets are leading the fundamentals rather than the fundamentals are leading the markets," said Robert Sinche, global head of foreign exchange strategy at Pierpont Securities. "It's certainly not the Fed's job to try to understand and respond to market sentiment. My sense is they'll be concerned but unmoved by what's going on, and markets are going to have to sort themselves out."
The drama has not changed his expectations for moderate global growth.
"The CRB metals index hasn't been showing the kind of cracks that would normally be associated with things really slowing down in the global economy," Sinche said.
"I think there were some overbought conditions in a number of markets," he added. "There are some policy risks in places like South Africa, Turkey and Argentina."
The markets—volatile since the first of the year—have not played out as conventional wisdom expected, Sinche said, and some investors are adjusting away from the long stocks, short bonds trade that worked at the end of 2013.
The Fed will be a key to the week.
"I think there was surprise about how well markets held up through the first announcement," Sinche said. "It's not clear they're going to hold up that well in the next couple of announcements. My feeling is the volatility will continue for a while. The market will feel unloved."
Stocks had their worst week in a long time, and buying in Treasurys drove the 10-year yield to 2.72 percent—its lowest level since November. The S&P 500 and Dow both broke below their 50-day moving averages, a negative sign.
The Dow was down 3.5 percent at 15,879, its worst weekly decline since November 2011, and the S&P 500 dropped 2.6 percent, to 1,790, its worst week since June 2012. The Nasdaq declined 1.7 percent to 4,128.
The S&P is now 3.3 percent below its Jan. 15 high of 1,850, and while traders are looking at a possible move to the 1,770 area, many analysts do not foresee a major correction (10 percent or more)—yet.
David Bianco, chief U.S. equity strategist at Deutsche Bank does not believe the sell off is the start of a correction, but he does expect more shallow pullbacks and more volatility. Bianco also does not expect the S&P 500 to register gains in 2014, and he sees it ending the year flat at 1850.
"It's not an earnings season that's bad, but it's an earnings season that justifies the S&P staying below 1850," said Bianco.
He said earnings are growing at about 8 percent this quarter so far, and the amount of companies beating estimates is good but more importantly the magnitude of the beats is smaller.
"What goes on in the world is important…we all get reminded the S&P is a global index. The U.S. economy is getting better but without the emerging markets growth engine, things like cap ex are not going to be as strong as they were last cycle. But things are getting better."
Both the ongoing debt ceiling debate in Washington and the Fed's actions will be key for markets in the near term. "At least we got a reprieve here on interest rates. There's something for everyone in what just happened," he said of the sell off.
"It's the indirect effect of Fed tapering that we're watching more than where yields go. We think even credit is going to be fine," he said. "It's watching the shift in Fed policy and how it affects other asset classes. We're getting a dose of it in emerging markets now. If it spills over to the dollar and weaker commodities prices then that would be a challenge to earnings."
8:58 a.m.: Services PMI
10:00 a.m.: New home sales
10:30 p.m.: Dallas Fed survey
2-day Fed meeting begins
8:30 a.m.: Durable goods
9:00 a.m.: S&P/Case-Shiller
10:00 a.m.: Consumer confidence
10:00 a.m.: Richmond Fed survey
1:00 p.m.: 2-year note auction
Second day of Fed meeting
1:00 p.m.: 2-year floating rate note auction
2:00 p.m.: FOMC statement
Earnings: Google, Exxon Mobil, Amazon.com, Chipotle, ConocoPhillips, Celgene, Eli Lilly, 3M, UPS, Royal Dutch Shell, Diageo, Occidental Petroleum, Colgate-Palmolive, Harley-Davidson, Northrop Grumman, LVMH,Time Warner Cable, Altria, Pulte Group, Raytheon, Ericsson, Blackstone, Viacom, Whirlpool, Under Armour, Cardinal Health, Visa, Potash, Tenneco, Sherwin-Williams, Autonation, Beazer Homes
8:30 a.m.: Initial claims
8:30 a.m.: Real GDP (Q4)
10:00 a.m.: Pending home sales
1:00 p.m.: 5- and 7-year note auctions
Earnings: Chevron, Honda, MasterCard, Autoliv, Brookfield Office Properties, Dominion, Mattel, National Oilwell, Tyson Foods, Weyerhaeuser, Booz Allen Hamilton, Lear, Legg Mason, Tyco, Mead Johnson, Aon, Paccar
8:30 a.m.: Personal income
8:30 a.m.: Employment cost index
9:45 a.m.: Chicago PMI
9:55 a.m.: Consumer sentiment
10:00 a.m.: Housing vacancies
By CNBC's Patti Domm. Follow here on Twitter @pattidomm.