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Traders watch data to see if sluggishness a ‘blip’

ADP's private sector jobs report and data on services sector activity could set the direction for stocks Wednesday.

While always important, economic data has become a flash point for stocks as investors try to assess whether a recent string of weak reports are signaling a slowing U.S. economy or just a weather-related blip.

ADP is expected to report that private sector payrolls grew by 189,000 in January, but traders are not seen putting much faith in the report after it showed 238,000 private payrolls in December. That number contrasted sharply with the surprisingly weak government December jobs report, which showed just 74,000 new jobs. January's employment report is expected to show 185,000 nonfarm payrolls when it is released Friday. ADP is reported at 8:15 a.m. ET.

Traders on the floor of the New York Stock Exchange.
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Traders on the floor of the New York Stock Exchange.

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ISM nonmanufacturing data, reported at 10 a.m. ET, is expected to show continued expansion at 53.5, up from 53. The sharp drop in ISM manufacturing data, however, has traders cautious about the services sector number. The drop in manufacturing activity triggered a decline of over 300 points in the Dow, on concerns the U.S. economy is slowing at the same time the Fed is moving away from its easy money policy.

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On Tuesday, stocks recovered some ground after Monday's big selloff, with the Dow up 72 at 15,445, and the S&P 500 up 13 at 1,755. The Nasdaq was the biggest gainer, up 34 at 4,031.

"There's still some downside ... still lots of momentum," said Clifford Noreen, president of Babson Capital, adding that he does not expect a much bigger correction. The S&P 500 has lost about 5 percent so far.

(Read more: Taper effect: Bigger correction coming)

There are signs that the selloff will not be deep, Noreen said, and one of those is coming from the credit market. The high-yield bond market is a leading indicator for equity market selloffs, he added, but it has held in and spreads have only widened about 5 basis points.

"It tells you the equity market is not going down that much further," he said.

(Read more: Stock market: Steady as she goes)

Noreen does not expect the emerging markets to become a big issue for stocks, nor does he foresee the selloff in Japan to affect U.S. equities. The Nikkei is down 14 percent since the beginning of the year.

"It's the market that went up the most," he said.

(Read more: Cashin: Need this to get past 'half-hearted' bounce)

Besides data, traders are watching another batch of earnings Wednesday.

Merck, Time Warner, Humana, Automatic Data, GlaxoSmithKline, Allergan, Estée Lauder, and W.R. Grace report before the open.

Twitter reports its first earnings as a public company after the bell. Yelp, Allstate, Green Mountain, Disney, Pandora, Solera, Standard Pacific, Tesoro, Fiserv, Akamai and Shutterfly also report after the closing bell.

—By CNBC's Patti Domm; follow her on Twitter @pattidomm.

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.