Stocks could have a hard time snapping out of their current trading range, which seems to be getting narrower and narrower.
From 'Fast Money':
In the coming week, there are a few catalysts for markets in inflation and housing data, and in Friday's quadruple expiration of futures and options. Traders are also watching the dollar and the corresponding moves in commodities, particularly oil, which at a 7-month high is beginning to worry stock investors.
The aftermath of the Iranian presidential election; the meeting of G-8 finance ministers in Italy over the weekend, and a meeting between the BRIC countries in Russia Tuesday are also being watched for their potential impact on markets.
Stocks ended the past week barely changed from the prior week's close, but the Dow managed to finish Friday in positive territory for the year. The Dow added just 0.4 percent to 8799, while the S&P 500 added 0.65 percent for the week to finish at 946. Investors, meanwhile, bid up some of the more defensive sectors, with utilities gaining 3.8 percent, as the week's top performer. Telecoms were also a winner, up nearly 2 percent, and energy stocks were up 2.3 percent, rising with the price of oil.
Stocks have defied the conventional view and have paused, but not pulled back, as many traders were expecting. Now that the quarter end approaches, some traders say stocks could be supported by fund managers who still need to show good returns for the quarter but also face pressure as others sell to lock in gains. The result could be continued sideways trading.
"You could have buyers go on strike because they know everyone's waiting for a pull back, and you have sellers not pulling the trigger," said Art Hogan of Jefferies.
"I think the market is going to have a very good quarter, barring anything crazy. I think there's a lot of pressure to be invested and that means a lot of buying on the dips," said Richard Cripps, managing director of portfolio strategy at Stifel Nicolaus.
Cripps said, however, watch out for earnings season. He said the next big driver for stocks, capable of triggering a pull back could come at the beginning of July, when companies start to show their hand on the second quarter's performance.
"I think one has to say the probabilities are good that you have some kind of pull back here," he said. "The pullback would be normal, and it's not the end of the world after a very sharp rally...We're on track to have an improvement in forward 12 months earnings expectations. The changing expectations and the change in stock prices are ultimately what synchronizes. If we continue to see improvement in earnings, we have to think any type of pullback is technical in nature."
He doesn't expect to see the market retest its March lows, but the downturn could still sting. "I do not think we retest the low, but I do think we could do 50 percent of the gain...if you want 100 years worth of history to speak to you, I would say that we are looking at a very mature, oversold market rally, coming off extreme levels," he said.
"If that's something you don't want to be in a position to experience, you should be selling here," Cripps said.
The lack of volatility in stocks in the past week was made up by heightened action in foreign exchange and the Treasury market, where the bench mark 10-year saw its yield rise to 4 percent. The 10-year ended Friday, yielding 3.78 percent, as buyers moved in after the Treasury's successful 30-year auction Thursday.
"I think we will calm down, and we will see slight declines in yield. It would be nice to see the 10-year yielding 3.5 percent. That would calm down a lot of the concern about the mortgage market," said Zane Brown, fixed income strategist with Lord Abbett. The move up in the 10-year's yield in the last several weeks is a particular concern since it corresponds to mortgage rates, which have been moving higher.
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Brown said the 10-year and 30-year will probably come under pressure again the next time Treasury auctions long-dated issues, in three week's time. In the meantime, the market should be relatively steady early this week and then faces possible volatility if economic data disappoints at the end of the week. He said he is paying special attention to Thursday's weekly jobless claims and leading indicators Thursday.
He also said Tuesday's meeting of BRIC countries—Brazil, Russia, India and China—could have more impact than what is likely to come out of the G-8. From G-8, "people will be looking for expressions of concern about the level of stimulus and just some evidence that the leaders are thinking about how they unwind all the stimulus they've flooded the market with," said Brown.
"People will read with interest about the other meeting. The BRIC countries, that's really giving people a great deal of concern when some of the key buyers say they are more interested in non-U.S. paper," he said. A lack of interest from key buyers in U.S. Treasurys would pressure yields, and therefore mortgage rates, hurting a housing recovery. Brazil, China and Russia have all questioned the dollar's reserve status.
The dollar was higher Friday after a volatile week. The dollar lost 0.25 percent to the euro for the week, finishing at a level of $1.3999 per euro. The dollar lost 0.5 percent against the yen.
Crude oil rose 5.3 percent in the past week, ending the week at $72.04. On Thursday, when oil touched $73, stock traders began to show concern about the impact on equities and the economic recovery. The stock market has been a beneficiary of the recent run up in commodities. "The price of a barrel of oil crossed the line this week. Now it's not a driver of the market," said Hogan.
Oil traders will be watching the outcome of the Iranian election. On Friday, both President Mahmoud Ahmadinejad and challenger Mir Hossein Mousavi were claiming victory.
Cripps said oil prices are now at a level where they could be a problem for companies. "The number we reached last time when we turned the corner was right in the $60 to $70 range. That's what the various companies were saying. Has that changed? It would probably work to their detriment sooner," he said.
Tim Smalls of Execution LLC said he believes stocks could trade quietly and trend lower in the coming week. "I don't think this is going to be the big pull back. What we're talking about is the longer it takes to get through the range, the more it means we could go below the range," he said. Smalls said its possible the S&P 500 could take aim at the 927 support level, then the 911 level, which is the 200-day moving average.
"This is the tenth consecutive day where the market has had a less than a 1 percent move," Smalls said Friday.
Patrick Kernen, who traders S&P 500 options, said the options market right now suggests low volatility. "Options are implying right now that we go out at the end of the month with the S and P between 900 and 980," said Kernen. Stock traders point to the current trading range on the S&P 500 as being between 920 and 950.
"It feels like we're in a market of indifference," said Kernen, who trades with Cardinal Capital. "I would not be surprised with everything expiring that we would see some gyrations next week." He said, however, options are suggesting small swings in the S&P, compared to those of recent months. "The market is implying we won't see a move greater than 23.5 points a day on the S&Ps in the next five days."
There's a steady stream of economic data in the week ahead, including inflation readings and housing data. The PPI is reported Tuesday and CPI is Wednesday. The National Association of Home Builders is reported Monday, while housing starts are Tuesday. The Empire State survey is Monday, and the Philadelphia Fed releases its survey Thursday. Leading indicators and weekly jobless claims are reported Thursday.
Treasury Secretary Tim Geithner appears before Senate and House committees Thursday to detail the Obama Administration's plan for restructuring financial regulation.
There are plenty of Fed speakers in the week ahead, including Fed Chairman Ben Bernanke who speaks Wednesday on community development financial institutions at the Operation HOPE Global Financial Literacy Summit. On Monday, Chicago Fed President Charles Evans speaks on the economic outlook, and Fed Gov. Elizabeth Duke speaks on the Fed's response to the financial crisis at the Women in Housing and Finance Annual Meeting.
Fed, Gov. Kevin Warsh speaks on economic policy and financial markets developments at the Institute of International Bankers Annual Meeting in New York. Evans speaks Wednesday on the current crisis in Chicago, and
There are a handful of companies reporting earnings in the week ahead.
Best Buy , Smithfield Foods and Adobe Systems report Tuesday. FedEx reports Wednesday.
Carnival and Smucker report Thursday, as does Research in Motion .
What Else to Watch
The Detroit Economic Club Monday hosts the National Summit in Detroit about the future of manufacturing, technology, energy and the environment. CEOs from a range of industries are expected to attend.
Also Monday, President Barack Obama talks about health care reform at the American Medical Association convention in Chicago.