Stocks staged a huge turnaround at the end of the week, giving their best weekly performance this year. A rally that started Thursday continued overnight and took off even more after the January jobs report. It was a mixed picture with a weak, 113,000 nonfarm payrolls. But drops in the unemployment rate, to 6.6 percent, and in the number of long-term unemployed were greeted as positives.
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The S&P 500 ended the week at 1,797, up 0.8 percent, but still down 2.2 percent since the start of the year. It had dipped as low as 1,737 during the week, and at that point was off 6.5 percent from its mid-January high.
The bond market, however, behaved more skeptically about the Friday jobs report. Yields initially fell, then reversed course but never made it back to the morning's prereport highs. The 10-year was yielding 2.68 percent.
"We'll see," said George Goncalves, Treasury strategist at Nomura Americas. "The equities market is funky. It's a momentum-driven market, and when it latches on to something it's hard for it to break. With the recovery from those technical levels, it makes people think there's a chance we'll get an upward move, and what was seen was not the last hurrah, and there's more to go."
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Stocks recovered some key technical levels, including 1,770 on the S&P 500, which was the 100-day moving average and now flirts with a major resistance zone around 1,800.
"The bond market thinks this was not a good number," Goncalves said of the jobs report, which came after December's even weaker gain of just 75,000 jobs. Stocks rallied Friday as emerging markets were calmer and mostly moved higher. The Fed's tapering and concerns that China is weakening had sent EM currencies spiraling lower.
"The EM thing is not resolved," Goncalves said. "It could fade into the background, and you don't know when it's going to resurface. It's interesting to see how the stock market is behaving, they're climbing the wall of worry again."
Traders are debating whether the worst of the selloff is over, but many said the markets will have to hear from Yellen before the path becomes clearer.
Chris Hyzy, chief investment officer at U.S. Trust, said the market could continue to back and fill over the next few weeks.
"I think we're going to see this two or three times this year—this is the first attempt at it," he said of the selloff. "The second will be when we get through the second quarter and start talking about policy changes or not. When we get closer to May, you're going to start to see the emerging market elections. Some of those larger ones are going to front and center."
The third selloff could come ahead of the midterm elections in the fall and when the Fed puts the focus on short-term rates, when it is finishing the last of QE, Hyzy said.
Stephen Stanley, chief economist at Pierpont Securities, said Yellen should present an optimistic outlook since the Fed expects 3 percent growth this year. Most economists see slower first-quarter growth, though growth was faster in the second half of 2013.
"QE tapering will most likely continue," Stanley wrote in a note. "Hawks and doves have both made clear that there is a very high hurdle to deviating from the current $10 billion per meeting pace of tapering. Yellen may not be that specific, but whatever she says about QE will suggest that it's in the process of being wound down. What she won't say is QE has worn out its welcome and is being ended more because of its ineffectiveness than because the labor market has truly returned to health."
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Yellen could also be forced to defend the Fed during the testimony, and she will have to explain its plan to keep short-term rates low for a very long time, according to Diane Swonk, chief economist at Mesirow Financial.
"I also think she's going to have to clarify what forward guidance is all about, although the unemployment rate has improved," Swonk said. "She's going to really have to qualify the labor market situation. They've got to move up their concerns about low inflation."
Goncalves said Yellen needs to come across as a centrist.
"Everybody knows she's dovish," he said. "She doesn't have to prove that point," and the market could react "if she sounds more centrist that growth in on track and so is tapering, that their message is they're not joking around about taking away the punch bowl," he added.
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One area in the bond market is signaling that it expects the Fed chair to succeed in the message about keeping short-term rates low.
"Short-term-rate futures are outperforming long-term-rate futures," Goncalves said.
Markets are also keeping an eye on Sochi, Russia, where the Olympic Games opened Friday with heightened concerns about terrorism.
A passenger on a plane bound from Ukraine to Turkey on Friday failed in his effort to use a bomb threat to divert the aircraft to Sochi.