Traders are hoping Monday's about face in the stock market is just a respite from its recent run.
"Let's call it a little dose of reality. It's ok. It's not a big swing -- 170 point swing in the Dow on light volume ... short term if you measure it by relative strength, the market was overbought," said Tim Smalls of Execution LLC.
Stocks have gained 15 percent in six trading days, and many traders believe it is experiencing a short-lived bear market rally. The Dow Monday closed 7 points lower at 7216, erasing a 2.3 percent gain in the final hours of trading. The Nasdaq led the decline, off 27 points or 1.9 percent, and the S&P 500 was off 2.66 points at 753.89.
Traders have been pointing to Friday's quarterly quadruple expiration of futures and options as one catalyst to push the market higher this week. "We had a little bit of profit taking. A little bit of selling before expirations," said Smalls. "... Historically, the expirations generally have a positive slant."
On the economic calendar Tuesday, investors will be watching producer price inflation data and housing starts, both reported at 8:30 a.m. The big event is the start of the Fed's two-day meeting.
There is also a House Financial Services hearing on regulating systemic risk in the financial industry. Senate Finance holds a 10 a.m. hearing on the tax implications of the Madoff ponzi scheme.
Several companies report earnings Tuesday, including Darden Restaurants and Adobe . Apple unveils its new iPhone operating system at 1 p.m.
The Fed obviously will not make a move on rates at its two-day meeting this week, but Fed watchers have been speculating it may say something about Treasurys, as it did after its last meeting. The Bank of England's purchases of sovereign debt has prompted the speculation the Fed will do the same. The meeting ends Wednesday with a 2:15 p.m. statement.
Miller Tabak's Tony Crescenzi said he believes the statement could be similar to the last one. The Fed is not likely to indicate it will start buying Treasurys, but that it continues to consider that option.
"It's more likely the Fed holds the carrot out than actually does anything," he said. "Yields are in an upward track already and because investors more importantly are looking at other asset classes, if the Fed fails to say anything you could see yields shoot up."
The meeting follows Bernanke's Sunday night appearance on "60 Minutes" where he basically repeated his view that the economy would recover this year if the financial system is fixed. He said there are "green shoots" of improvement. Analysts and traders largely give him high marks on the interview.
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"I think he's gotten the message out: 'We're here for you,'" said Crescenzi.
Crescenzi said the message from Washington in general is improving, including from President Obama himself and that it seems to be an intentional shift. He also said it may be time to start looking for data to start to show signs hitting bottom, or "troughing."
"This is the week for trough time ... seeing how the mood is shifting toward the idea ... The watch will be on. I feel this quarter is the worst. Many feel that way," he said.
"If the mindset is moving toward the 'green shoots' idea, maybe people will be more watchful and sensitive to these numbers," he said of the economic data.
One example of improvement showed up last week in Thursday's retail sales number, which was better than expected for the second month. There are also several government programs that should start to help the economy, including the TALF for consumer debt, and the soon-to-be announced public private investment fund for banks' toxic assets. The first results of the TALF should be made available a week from Thursday, he said.
Correction: An earlier post erred on the earning dates for Sirius and on the Nasdaq closing data.
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