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Wednesday Look Ahead: Stocks Could Trade Sluggish and Sideways

Stocks could continue to trade sluggishly Wednesday, but traders are watching the durable goods orders report expected tomorrow as a potential source of volatility.

NYSE Traders
Oliver Quilla for CNBC.com
NYSE Traders

The market Tuesday moved slightly on both sides of unchanged, with the Dow closing down 25 at 12,356 and the S&P off 1 point at 1316.

Durable goods for April are reported at 8:30 a.m. and are expected to be negative 2.1 percent, after a gain of 4.1 percent. There is also a 1 p.m. auction of $35 billion in 5-year notes.

"I think the fives (year notes) will be good. Where they come in depends on durables. The first month in the quarter is weak. That's what is expected," said John Briggs, Treasury strategist at RBS. Briggs said the bond market, which has rallied over the last several weeks, may be overextended. "We are failing to rally on news that would normally make us rally. It's a little tired," he said. Treasurys gained slightly Tuesday, with the yield on the 10-year slipping to 3.12 percent.

The euro firmed Tuesday, helping risk assets stabilize after Monday's sell off. The euro was at 1.4110, up 0.4 percent against the dollar.

"You've seen the euro, to some extent, find its feet. It feels like it's still subject to the next headline, and the euro could go back down again on any additional negative news," said Alan Ruskin, head of G-10 currency strategy at Deutsche Bank.

"I think we have uncertainties overhanging the market. If anything, the news headlines will be negative risk rather than positive risk until we get headlines that Greece is going to get new funding. Realistically we have (European) finance ministers meeting June 14 and 15 and the heads of state meeting June 24. We could be waiting for some time," he said. "If anything, we'll move down more just because of "risk-off" trades."

Ruskin said the end of the Fed's quantitative easing program at the end of June could also be a factor for the dollar. "The end of QE may be more dollar-positive through a squeeze on risk assets. There might be some front running of that. Probably what we've seen (sell offs in stocks and commodities) is probably related to the run off of QE2," said Ruskin.

The Fed's quantitative easing program, known as QE2, involves the purchase of $600 billion in Treasury securities by the end of June. The program has been seen as a catalyst for stock and commodities prices, since in theory, the Fed purchases in the bond market would drive investors into riskier assets.

Whither Stocks

The debate in the stock market is now about whether the market is in a correction and for how long. A number of analysts see the market trading in a sloppy fashion into the summer, but they do not foresee a deep correction.

Jordan Kotick, global head of technical strategy for Barclays Capital, points to the action in the Russell 2000, which is now down more than 6.4 percent from its April high. The S&P 500 is down about 3.5 percent in the same amount of time. "Small caps have led the large caps since we bottomed." in March, 2009, he said. "The Russell is still trading heavy."

Kotick said the market is likely to stay in correction mode for awhile. "Historically you tend to correct a little more in the summer months. Most times, you want the market to rip the band aid off. This is the summer of 1000 nicks," he said.

"I think the correction will be felt greater in time than in price," he said.

Kotick said there are a few catalysts to send the market lower. "If you think of the marriage of European events, and the end of the Fed (easing) and summer illiquidity, you have the perfect setup for a correction," said Kotick.

"Market that's going to be particularly volatile."

Oil Drill

Oil jumped Tuesday after Goldman Sachs raised its price forecast for Brent crude to $130 per barrel over the next year and said investors should now buy oil, copper and zinc. WTI crude on the NYMEX finished at $99.59 per barrel, up 1.9 percent.

Traders are watching EIA inventory data at 10:30 a.m. The API report late Tuesday showed a smaller-than-expected drop in crude stocks to 860,000 barrels, but a much greater increase in gasoline inventories to 2.4 million barrels, well above the 300,000 expected.

More proof that drivers are cutting back came from MasterCard Tuesday, which said thatretail gasoline demand fell even as prices dropped for a second week. MasterCard Advisors Spending Pulse said gasoline demand fell 2 percent last week.

Paramount Options President Ray Carbone said Tuesday's price action in oil had a lot to do with short covering, as the Goldman report pushed prices higher. "Goldman is able to move the market, especially on a lower volume week. This is a market that's going to be particularly volatile for the next couple of weeks, and it's going to get more volatile as the volume dissipates this week. It seems like it has a little bit of life to it right now, but I think it's a headline-driven, low confidence market," he said.

Kotick said oil may be in for the same pattern it followed last summer, when it was down a sharp 24 percent in May and then traded sideways before eventually rising again.

On the earnings front, results are expected tomorrow from Costco, Polo Ralph Lauren , Hormel and homebuilder Toll Brothers .

Questions? Comments? Email us at marketinsider@cnbc.com

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