The Fed's mid-week meeting and a record $104 billion of Treasury auctions are the big hurdles for stocks in the week ahead.
The week's economic data includes existing and new home sales data and durable goods, all important measures of the state of the economic recovery.
Investors will also be interested in testimony from Fed chairman Ben Bernanke before a Congressional committee Thursday on his role in the Bank of America, Merrill Lynch merger.
And, they'll be keeping an eye on tech stocks after weekend news that Apple CEO Steve Jobs recently underwent a liver transplantand some key earnings out of the sector.
Apple stock tanked in January when the company announced Jobs would take a six-month health leave, but has since recovered. He is still expected to return to work in late June. On Friday, Apple's new iPhone hit store shelves.
The big event for the market is the Fed's statement Wednesday.
The Fed is likely to be cautious in its comments about the economy's improvement, and many Fed watchers expect it to reinforce its commitment to hold rates down while economic conditions improve.
The Fed may even tweak its quantitative easing program, under which it has been purchasing Treasurys and mortgages.
"I'm sure they'll say things look better then they looked six to eight weeks ago..
I would say probably they've been encouraged by how things have improved," said Stephen Stanley, chief economist at RBS Greenwich Capital.
"You go back to the March meeting when they announced the purchase program...At that point, I think they were bracing for the worst.
The turnaround from there to here in three months has been dramatic.
The employment number is the latest bit of evidence...it doesn't mean we're in a healthy position The economy is still contracting," he said.
Stanley said the Fed could alter its purchase program, by possibly slowing down the purchase of Treasurys or extend the time frame past the current September deadline.
He said the Fed mortgage purchases should be a more effective way of getting rates down.
"It's just not clear any more that the Fed buying Treasurys is bringing rates down.
It just doesn't seem to have the effect they want," said Stanley The Treasury's heavy issuance calendar has coincided with rising yields in the last several weeks, which in turn resulted in a creep up in mortgage rates.
Traders fear rising rates could snuff the economic recovery and hamper the housing market's ability to heal.
In the coming week, Treasury auctions 2-year, 5-year and 7 year notes in three separate auctions Tuesday through Thursday.
Unrest in Iran following disputed presidential elections will continue to be a focus though it so far has had no impact on markets.
Once the Fed's two-day meeting is over, traders say stocks could continue to trade quietly into the quarter end.
"The (thin) volume in the market is a good indicator that people are sitting on their hands, hoping the market trades without them into the start of the earnings season," said Patrick Boyle of LaBranche Financial.
Boyle said stock traders are also keeping a close eye on the credit markets, which in the past several sessions showed the first signs of weakening since March.
High-yield, in particular, lost about 1.5 percent for the week, but that was slight compared to returns of about 30 percent in the past three months.
The improved health of the corporate bond market is supportive of stocks and can be an important monitor of the market's vitality.
"It's definitely weaker this week for sure," said Greg Peters, global head of fixed income research at Morgan Stanley. "There's no single catalyst. I think next week is important. You have some (corporate bond) deals that are going to come...There has been this crowding out affect. The Treasury auctions are so sizeable and so important that takes away from the ability to do deals in corporates in that period of time. I think this next week with the calendar coming, you'll get a sense of the true sentiment."
"My guess is in investment grade, you'll see buying on the dips and some firming, and I think high yield is going to be a somewhat different story," said Peters.
Several hearings may get investors attention in the week ahead.
On Monday, a Senate Banking subcommittee holds hearings on regulation of over-the-counter derivatives. But the hearing that will be most closely watched will be Thursday, when Bernanke appears before the House Committee on Oversight and Government Reform.
The bottom line for markets is whether Bernanke damages his credibility when answering questions about his role in the merger of Bank of America and Merrill Lynch.
After four weeks of gains, stocks finished the past week lower, the second losing week in eight.
The Dow lost nearly 3 percent to 8539; the S&P 500 slumped 2.6 percent to 921, and the Nasdaq was off 1.7 percent at 1827.
The dollar traded in a saw tooth pattern, ending the week just 0.4 percent higher against the euro, but 2.2 percent lower against the yen.
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The bench mark 10-year Treasury ended the week lower, which lifted its yield to 3.792 percent.
The stock market's best performers in the past week were defensive issues. Health care rose more than 2 percent. Investors traded out of the cyclical names that represent the "reflation" trade, with energy falling 6.5 percent, materials falling 6.4 percent, and industrials off 5.6 percent.
It's not surprising that oil and other commodities were lower in the past week.
Crude finished at $69.55 per barrel, down 3.5 percent, while gasoline fell nearly 6 percent, and heating oil fell 2.8 percent.
Natural gas though rose 4.5 percent. Copper fell 5.2 percent; corn was down 6.2 percent, and soy beans were down 5.3 percent. Gold also lost a little luster, sliding a half a percent to $936.20 per troy ounce.
Brian Belski, chief investment strategist at Oppenheimer, is bullish on the stock market but is not a big fan right now of the "reflation trade." His favorite sector is tech.
"We like companies that generate cash. That's why technology is our favorite sector, and that's why quality will show leadership. We have shown that the prior leadership is never our new leadership.
Tech has pristine balance sheets, lots of cash, and has done a great job taking out capacity in the last five years. Where the commodities companies have been building capacity in the last few years," he said.
Like many strategists, Belski said it's possible the market could pull back, but he does not expect it to be deep.
"I would say it will be a fade. I think a fade could be anywhere from 5 to 15 percent," he said in a phone interview this past Thursday. "After three days of choppy behavior, if it's going to happen at any period, it's going to happen now. I think fourth quarter is going to be great for stocks."
Belski also stands apart in his belief that the market has entered a new bull market, and the current rally is not just a bear market rally.
"I think the bull market started in March with much doubt and negativity. That's how all bull markets start and now given what we've seen and the type of volume in the market that shows us there are not a lot of people involved...The 'long onlys' might be repositioned but they have not bought into it. All that's happened is investors have become market weight again, or not even," he said.
Belski said the next week and a half could be relatively quiet for stocks ahead of the quarter's end.
"I think people want to show the gains they made, so they don't' want to show they sold out of stocks. They want to hold them," he said. "..You might have some volatility around second quarter earnings."
Stanley said the quarter end could be a significant time period for some markets.
"There hasn't been a routine quarter end over the last two years, and this is going to be a significant one, particularly because you have this special assessment of the FDIC on banks," he said.
The assessment is on assets as of June 30.
"There's even greater incentive than usual to get balance sheets down, and we've already seen ripples of some of that in the funding areas. It just adds to the pressure for people to take trades off and take risk off, than you normally see around quarter end," he said.
What to Watch
Housing data in the coming week includes existing home sales for May Tuesday, and new home sales for May Wednesday.
May durable goods are reported Wednesday. Weekly jobless claims, and the final look at first quarter GDP are Thursday.
Personal income for May and consumer sentiment are reported Friday.
Economists expect existing home sales to rise 2.6 percent, to 4.8 million, and new home sales are seen at 361,000, up 2.6 percent.
Durable goods orders are expected to decline by 1.5 percent, after a gain of 1.7 percent in April. Weekly jobless cliams are expected to stay roughly flat at 610,000.
Several major earnings reports are expected in the coming week, including Oracle on Tuesday; Nike and Monsanto Wednesday, and Palm on Thursday.