Geopolitical pressure could return as S&P reaches for 2,000

Traders work on the floor of the New York Stock Exchange.
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Traders work on the floor of the New York Stock Exchange.

Traders are watching to see if the S&P 500 can close above 2,000 Tuesday, as a meeting between Russia, Ukraine and the EU puts geopolitics back in focus.

The S&P 500 crossed above the psychological 2,000 line for the first time Monday, and while failing to hold, it still closed at a new record high of 1,998. The Dow was up 75 points at 17,076, and the Nasdaq was up 18 points at 4,557. It was the lowest volume day of the year.

"There's no one around. People have no reason to sell," said Michael O'Rourke, chief market strategist at Jones Trading. "You had (Fed Chair Janet) Yellen and (ECB President Mario) Draghi come out at the end of last week, and I thought Draghi was very dovish and people were spinning Yellen as less dovish."

The market, buoyed by the idea of more central bank easing, also looked past geopolitical events. Ukraine Monday accused Russia of sending soldiers across the border to open a new front, with a caravan of a dozen tanks and armored vehicles reportedly entering southeast Ukraine. The incident adds even more tension ahead of Tuesday's meeting between Russian President Vladimir Putin, Ukraine President Petro Poroshenko and senior EU officials in the Belarussian capital of Minsk.

"I think what the markets are hoping for, at this point, is a short-term deal that stands down the armies. There won't be any kind of long-term deal," said Paul Christopher, Wells Fargo Advisors chief international investment strategist.

Besides the Ukraine meeting, there is batch of U.S. economic reports, including durable goods at 8:30 a.m., and S&P/Case Shiller and FHFA home price data at 8 a.m. Consumer confidence is reported at 10 a.m. There are also morning earnings reports from Best Buy, WPP Group, Sanderson Farms, Trina Solar, Bank of Montreal and Bank of Nova Scotia. Tivo, Smith and Wesson, Bob Evans and Analog Devices report after the bell.

But the wild card for stocks could be the shift in focus back to Ukraine, since the euro zone economy has shown signs of deterioration in recent months and Russian sanctions have been blamed. Oil prices, usually sensitive to geopolitical events, ignored the situation in Ukraine Monday and also in Libya, where rebels seized the airport.

"Oil's had a huge down move and all these people are (still) talking about inflation," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. Chandler noted that the dollar index was at its high of the year Monday, and its poised for further gains. He said the global capital markets appear to be ignoring the geopolitical tensions.

"I would say investors are still being rational—that these geopolitical events are real, but they are not center stage. Maybe because there's bigger issues," he said, noting the ECB and Fed both have new economic forecasts next month. The market is awaiting further ECB easing, and the Fed meets in September, possibly revealing more information on its exit strategy.

Another saga the oil market has been ignoring is the assault of ISIS on Iraq and Syria, and the potential for a broader U.S. reaction.

"I think it's serious—the idea that the idea that the Obama Administration is thinking about bombing in Syria. You just can't stop ISIS by just bombing Iraq," Chandler said. ISIS is the Islamic State of Iraq and Syria, and the radical Sunni group believes there should be no border between Iraq and Syria.

The group brought more attention on themselves with the execution of journalist James Foley. A Wall Street Journal survey, earlier in the month, said that 40 percent of Americans did not know enough about ISIS to make a decision on how the U.S. is dealing with it.

"They've shown tactical and strategic success in the battlefield," said David Phillips, Director, Program on Peace-building and Rights Institute for the Study of Human Rights at Columbia University.

"The Administration deserves credit for having acted in the 11th hour for preventing Iraqi Kurdistan from being overrun. But they haven't articulated a strategy. We've heard from the Department of Defense some thinking out loud about going after ISIS in Syria. Does that represent a shift in U.S. policy? If it does, we're going to need to understand why we're going into Syria and why after years of standing on the sideline, why we're suddenly engaging in Syria's civil war," he said

—By CNBC's Patti Domm