Will the data prove Janet Yellen right?

This week will bring the focus back home — back to those "data points" that Federal Reserve Chair Janet Yellen outlined last week when she spoke of that improving economy. Traders and investors want to believe that the data are, in fact, pointing to better/stronger days ahead.

The market initially had a knee-jerk pullback to her testimony as traders (not investors) reacted swiftly and negatively to the implication that rates may be going higher sooner than what the market was prepared for. But honestly, traders want to be able to throw their weight behind Yellen and jump on board. They want to see if the data supports her testimony.

trader on the floor of the New York Stock Exchange reacts to an announcement from the Federal Reserve during the afternoon of March 19, 2014 in New York City.
Getty Images
trader on the floor of the New York Stock Exchange reacts to an announcement from the Federal Reserve during the afternoon of March 19, 2014 in New York City.

The jury is out: Some believe that Janet made a "rookie mistake" in her press conference last week as she detailed her plans. But I'm in the camp that, not only did she do the right thing, she did exactly what the market, investors and traders needed — a dose of reality. A recognition that the party is approaching its end and that investors and traders should position themselves accordingly — whatever that position may be according to your criteria.

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Now therein lies another dilemma: Does an end to stimulus and support mean the end of the party? Or does it mean that the economy is strong enough to throw its own party without the help of the Fed? I, for one, believe that the answer can and will be found in the data coming out over the next few months as spring arrives and weather can no longer be used as the crutch.

So, what is the path forward for the Fed? I think they should stick to their plan: That the market will perform better, though, to be clear, that doesn't necessarily mean that it goes up. It just means that when the market has some sense of a real time line for withdrawal and normalization of rates, then it can once again begin to trade on real fundamentals vs. trading the stimulus. Better means more clarity and not this guessing game. Next, the Fed should stick with the plan that, even if the market should become a bit unsettled — because it might take some time to "rebalance" after five years of stimulus and a rebalance is good. Remember, a falling market — representing a "sale" on Wall Street — isn't necessarily a bad thing for the long-term investor. Just ask Warren Buffett!

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Now, much depends upon so many other factors: global stability, global growth, emerging-market stability and the omnipresent geopolitical issues that currently invade the conversation. With little developments over the weekend, the situation in Crimea, Ukraine and Russia seems to have subsided. And, as long as this is the case, the market won't get sidetracked. Investors and traders will focus on the domestic picture.

I suspect that the market will attempt to test a bit lower but then be held in place as quarter-end window dressing takes place as we move into the later part of the week. We remain in a bullish trend with the S&P 500 solidly in the 1840/1880 trading range. Do not be surprised to see a challenge of the highs as we move into the end of the week. That being said, I don't see a break out through the all-time highs just yet.

This week we will also hear from two Fed presidents: St. Louis's James Bullard will be speaking in Hong Kong on Wednesday ("Central Banks: Will policy making ever be conventional again?") and Chicago Fed President Charles Evans will be speaking at an Asian investment conference on Thursday.

Here's what we want to see: Will they run counter to what Minneapolis Fed President Kocherlakota said on Friday? Kocherlakota was the lone dissenter in the last Federal Open Market Committee meeting, saying he didn't support the current message, pressing the Fed hard on the promise to keep rates low until unemployment reaches a minimum of 5.5 percent and inflation hits the 2 percent rate.

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In addition to the Fed speakers, the economic data points that will draw investor attention this week include: Markit PMI, the housing-price index, new home sales, pending-home sales (although I suspect they will discount due to weather if they are weak), durable goods, and Thursday will bring us final revision to fourth-quarter GDP. Expectations are for 2.7-percent annual growth rate, up from the prior estimate of 2.4 percent. If this report shows improvement, it will help bolster the Yellen commentary.

Either way, expect it to be an interesting week as the data heat up and investors now hold Yellen responsible for an improving economy to justify the continued taper and normalization of rates.

—By Kenny Polcari

Kenny Polcari is director of NYSE floor operations at O'Neil Securities and a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.

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Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.