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Market Insider: Stocks Tug of War

A tug of war between bulls and bears stalled the stock market Wednesday and could do so again Thursday, as traders focus on hours of testimony from Treasury Secretary Tim Geithner.

However, traders say there could be a pickup in volatility from Friday's quadruple expiration of futures and options. They are also keeping a close watch on the dollar and Treasury yields.

Geithner speaks at back-to-back hearings before two Congressional committees on the regulatory reform plan unveiled by President Obama Wednesday.

"No one wants to be the jerk that bought or sold ahead of Geithner speaking," said Steve Grasso of Stuart Frankel.

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Traders are also watching weekly jobless claims, expected at 8:30 a.m., and then the Philadelphia Fed survey and leading indicators, both released at 10 a.m. Geithner begins speaking at 9:30 a.m. before the Senate Banking Committee. At 1:30 p.m., he moves to the House Financial Services committee.

Research in Motion reports earnings after the bell.

The Dow slid 7 points Wednesday to 8497, and the S&P 500 was off 1 point at 910.

Grasso said he saw hedge funds among sellers Wednesday, and mutual funds were mostly sidelined. "Mutual funds have become price sensitive buyers, definitely without their foot on the gas," he said.

"We have seen a blast through to the downside. I've got to assume we're going to dip through 900," Grasso said. But he said the market has been surprisingly resilient. "The bears feel like, 'why can't they crack this?' We bounced off 903 which would be flat for the year on the S and P ... The bulls feel like that will be some sort of support," he said.

As Obama unveiled his plan to toughen regulation of the banking system, a parade of banks Wednesday made a public show of repaying money lent under the government's Troubled Asset Relief Program. Financial shares were the worst performers, down 2.6 percent, in part on a move by S&P to lower ratings or revise its outlooks for 22 banks.

S&P said operating conditions are less favorable than in the past. Interestingly, one of the reasons for the "less favorable" atmosphere is "tighter regulatory supervision."

Corporate bonds came under some mild selling pressure Wednesday, most particularly in the bank names.

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"There was a little profit taking. The spreads in the financials were a little bit wider," said Chris Towle, director of high yield and convertible securities at Lord Abbett. He said the market did recover a bit later in the day, and the selling was not "heavy duty."

"It's following equities. It's a little bit of a summer lull here ...," said Towle. "I just think the market is waiting for more evidence of economic fundamentals turning. It's really got nothing to do with actual fundamentals, other than how far is "it's not getting any worse" going to carry you in financial markets."

Corporates have been rallying since year end, and Towle said it's not surprising for the corporate market to slow down heading into summer. "It's been a one way trade since December," he said.

Treasurys turned lower in the afternoon, as stocks recovered some losses. The Fed was again a buyer, taking in $13 billion in two days. The 10-year was yielding 3.67 percent.

"The market is a little overextended," said John Spinello, Treasury strategist at Jefferies. "We still don't have supply until Tuesday, but I would doubt if tomorrow you wouldn't start thinking about the supply going forward."

"I'd look to the 3.68 (percent) to 3.70 (on the 10-year yield) as an area where the back up might have some follow through," he said. "I'm not convinced yet that we won't retest 4 percent." Spinello said that type of move is likely ahead of the Treasury's auction of long dated issues in the first week of July.

The dollar , meanwhile, fell for a second day against major currencies. Oil firmed , closing 0.8 percent higher at $71.03 per barrel.

"It was kind of a tipsy turvy day in the currency market," said Boris Schlossberg of GFT Forex. "We had good news in Europe. It got ignored, and the dollar got stronger. Then, it totally reversed as risk appetite came back."

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The dollar remained weak after S&P affirmed the rating of the U.S. government. Schlossberg said that news is bullish for the risk trade. "The risk trade is getting a little tired here. Maybe this was the pause and refresh, but it doesn't really fell like it is enough. The euro especially is nowhere near its year's highs. It's mired below $1.40 ... I still expect the risk currencies to come in, and oil to come in."

M.F. Global's John Kilduff said for now, the trend points higher for oil prices. The aftermath of the Iranian presidential elections could start to be a factor if unrest keeps getting worse.

"It's obviously deteriorating. This is the proverbial genie out of the bottle," said Kilduff. "I don't buy this theory that they will pump more oil to pay the bills. If anything, oil is hanging in the balance at some point."

"I think the fact that oil shook off a pretty bearish inventory build today is important," he said. "Technically, it still looks good so I do think we're heading higher still."

Questions? Comments? marketinsider@cnbc.com

  • 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.

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

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