The first quarter appears to be going out with a whimper for stocks, but turbulence lurks just beneath the surface.
The , after three months of ups, downs and several new highs, is closing in on the end of the quarter just about where it began. It's barely changed—less than 0.1 percent away from its Dec. 31 close.
Friday's session should be a key to the coming quarter, as themes now dominating markets should continue to do so. With an eye on the Fed, traders say markets are adjusting to the expectations for higher short-term interest rates, which have driven short-term yields higher and are wringing some of the riskiest excess out of the stock market. They are also watching economic reports to see if it was harsh winter weather that held back the economy or something else.
Though volatile, the S&P appears to have stagnated this quarter, while the bond market started the year at its lows and moved higher. The 10-year note yield, moving opposite the price, began January at 3 percent and has never returned to that level. But yields at the shorter end of the curve have made recent strides higher, with the yield rising to 1.7 percent Thursday, while the 10- and 30-year yields declined.
In fact, the spread between fives and 30s is the flattest in five years. The 30 year was yielding 3.52 percent Thursday, close to the key 3.50 percent level that it hasn't seen in eight months. Some traders worry a flatter curve could be negative for stocks, and that it's signaling a weaker economy. But they also say the bond market is catching up to a Fed that has been moving away from easy policy and shows no signs of turning back.
"It was easy to fall into the trap that short-term rates will never move. That was a fallacy," said George Goncalves, head of rate strategy at Nomura. But the long end of the curve has been tamer than expected by many in the markets.
Read MoreStock market gives divergent signals
"It's interesting to see Treasurys outperform when everyone thought they were going to be under pressure because of tapering. It hurts equities more," said Goncalves.
The Fed last week proceeded to pare—or taper—another $10 billion from its monthly bond-buying program, but it was a comment from Fed Chair Janet Yellen that spurred the curve flattening move in bonds and shake out in stocks. She said the Fed could move to raise rates within six months of the end of its bond-buying program. While not surprising, no Fed official had actually articulated as clear a time frame before and that moved market expectations forward for a rate hike.
In the stock market, it added fuel to a selloff in the momentum names—biotechs and Internet stocks prominently among them. Some of the momentum plays bounced slightly Thursday, but others stayed under pressure and the corrections have been large in keeping with the outsized gains. Tesla, for instance, is now down 18 percent in the last four weeks, but it is still 37 percent higher since the beginning of the year.
"Mostly people think of momentum names as stocks that are trading mostly on emotion, rather than fundamentals," said Randy Frederick, managing director of active trading and derivatives at Charles Schwab.
"The high momentum stocks tend to be the stocks that people looking for short-term opportunities are looking for, when they have confidence in the near term. If people become concerned that we're heading for a correction, they bail out of those first."
Frederick expects the stock market to end higher this year, but he said there are signs the market could be heading for a much-needed correction. "This was a tough quarter. Year to date, the S&P is nearly unchanged. When we hit record highs back on March 7, we were looking pretty good at that time. We were up 1.6 percent. I think there was some pressure if you're a professional to book some profits," said Frederick. There was a 5.8 percent pullback in the S&P 500 that ended in early February.
He said that the market looked dicey when Russia invaded Crimea but some of that concern has faded for now though investors remain uncertain. This week's American Association of Individual Investors' survey also showed a rise in investor uncertainty. The AAII said bullishness fell 5.6 percent to 31.2, but neutral sentiment increased, up 3.2 percent to 40.2 percent—a nine-year high.
As the quarter ends, talk swirled that pension fund selling has been a weight on stocks, as they moved money to bonds and trimmed some stock holdings that have swelled with market gains. There was also talk that some hedge funds were feeling pain in momentum names as investors saw an opportunity to raise funds in the group. But there was also a rotation by investors into steadier big-cap names, and gains in stocks, like AT&T, Verizon and Exxon limited the Dow's losses Thursday. The Dow was off 4 at 16,264, and the S&P was off 3 at 1,849.
But the move out of risk has shown up most in things like the small-cap Russell 2000, down 3.5 percent this week, and now off 1 percent for the year. The Nasdaq too has felt the brunt of selling, with a nearly 3 percent decline for the week so far, and a loss of 0.6 percent for the year. Both were outperforming earlier in the year. The Dow, meanwhile, is off just 0.2 percent for the week, and the S&P is off 0.3 percent.
Personal income and spending will be reported at 8:30 a.m. ET, and consumer sentiment will be released at 9:55 a.m. Blackberry reports earnings before the bell.