Stocks are vulnerable to the dual tensions of a stronger dollar and rising Treasury yields.
Tuesday marks the first of three Treasury auctions this week, with $35 billion in 3-year notes expected. There is also wholesale trade data, reported at 10 a.m., and the NFIB small business survey, due at 7:30 a.m.
From Fast Money
Traders though are fixated on a shifting market dynamic, where the prospects for economic recovery and the swell of new Treasury supply have prompted a wave of selling in Treasurys. At the same time, the dollar has moved higher and commodities lower, though some like crude, have held gains.
Stocks were flattish Monday, after rallying back from a triple digit Dow loss, on very light volume. The Dow finished up 1 point at 8764, while the S&P 500 slipped 1 to 939.
The best performing sector Monday was financials, up 1 percent as investors await news this week on which banks will be allowed to repay the Troubled Asset Relief Program. Materials were the worst performers, off 1.6 percent, as commodities weakened.
Investors are also awaiting direction following a Supreme Court justice's move to temporarily delay the sale of Chrysler to Fiat, raising doubts about the company's future and the impact on the industry. Chrysler had no immediate comment unitl it receives further information from the court. General Motors, meanwhile, is expected to see some new members named to its board soon.
As stocks meandered Monday, Treasurys saw selling along the curve. The selling forces an opposite move, where rates rise, and rise they have. The 10-year yield has crept up to 3.868 percent, and many traders believe it could be headed to 4 percent or higher.
A move above 4 percent could put the stock market's rally to the test, according to Cowen's John O'Donoghue. He said 4 percent on the 10-year is a round number and seems like a level where Treasurys could attract away investments from equities. He said for now, stocks seem to be stuck in a mode where they will move sideways to lower.
"I think the market could just be doing a grind here. It's the kind of thing where you're down 1 percent, then it's flat, then you're down a half a percent," he said.
John Spinello, Treasury strategist at Jefferies, said the 10-year's yield could be at 4 percent very shortly. Treasurys have also been selling off in the last two sessions amid speculation the Fed could move to raise rates sooner than anticipated, though many traders believe those expectations are unfounded.
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"It's economic, as well as pretty much a psychological change. It was fast and abrupt and probably not as warranted as the market is making it seem," he said of the move up in rates. Spinello said seasonality could be also be a factor. He noted that in five of the last seven years, rates peaked in June.
Spinello said he expects the long-end to be under pressure as auctions approach Wednesday and Thursday for a combined $30 billion in 10- and 30-year notes.
The S&P 500 has been holding up fairly well, but it is now trapped in a range. "Today, it held 928/929, which was its prior break out level," said Scott Redler of T3live.com, who follows the market's short-term technical moves. "The new trading range for the market is 920 to 960, and until that's resolved, traders are selling strength and buying dips, and big opportunities are few and far between right now," said Redler.
Redler said he is also watching gold. "I'm looking to buy gold on the pull in. $880 to $910 could hold. If it holds, gold could have a very explosive move in the second half of the year," he said. Gold lost $10 per troy ounce Monday, or 1 percent to $951.70.
A rising dollar usually trades in tandem with falling oil, but in the last couple of sessions that trade has "decoupled." The dollar finished up 0.4 percent against the euro, after being higher much of the day. Crude finished $0.35 per barrel lower, at $68.09, after trading flat to slightly higher much of the day Monday. Traders say oil normally would have fallen much further.
"It's unusual ... there's less correlation," said Joseph Trevisani, chief market analyst at FX Solutions. "The dollar strength is probably more directly related to what (Fed Chairman Ben) Bernanke said last week and what Treasurys have done, then any real recovery in the U.S. Some of the recovery in oil pries is probably more driven by growth overseas, as in China and India, than in the United States."
Bernanke told Congress last week that the U.S. cannot run up endless deficits and needs to show a plan of fiscal constraint. That commented prompted the run up in rates which are supporting the dollar.
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Traders said the trend of a rising dollar and firming crude could continue though they don't expect it to last too long. As trading started in Asia early Tuesday, oil was firming and the dollar was declining.
"We're consolidating this whole week. We don't have any data until the middle of the week, when the big event will be retail sales out of the U.S.," said Boris Schlossberg, director of currency trading at GFT Forex.
Schlossberg said he expects the dollar to retrace against the euro and sterling. "By no means, is it going to be a one way street ... The euro and pound are not going to give back their hard won gains easily," he said, adding he expects the dollar to move higher in a jagged pattern.
On Tuesday, oil traders will be watching late afternoon inventory data from the American Petroleum Institute.
What Else to Watch
In Washington Tuesday, the Joint Economic committee holds a hearing on the TARP, and a House Financial Services subcommittee holds a hearing on OTC derivatives and swaps. Treasury Secretary Tim Geithner testifies before a Senate Appropriations committee on the Treasurys budget request at 10 a.m.
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