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Stocks enter May with low expectations

Stocks are stumbling out of the gate this May, a month that does not usually bring big gains.

The S&P 500 lost 1 percent Thursday to 2,085, giving it a 0.9 percent gain for the month of April. The Dow lost 195 points, ending at 17,840, and while it finished April with a 0.4 percent gain, it is now about flat for the year so far.

Stocks typically score gains about half the time in the month of May. The S&P 500 over the past 20 years has been up a slim 0.18 percent on average, according to analytics tool Kensho. That compares to positive returns 75 percent of the time in April, with average gains of over 2 percent.

A trader works on the floor of the New York Stock Exchange.
Lucas Jackson | Reuters
A trader works on the floor of the New York Stock Exchange.

"I have a feeling futures will be up a little bit (Friday). Whether we hold is a different story," said Scott Redler, partner with T3Live.com.

There's some important data Friday including ISM Manufacturing, construction spending and consumer sentiment, all expected at 10 a.m. ET. There are also monthly vehicle sales, which could be strong, at an annualized selling pace of 17 million.

Earnings are expected from Chevron, CVS Health, Clorox, Duke Energy, Moody's, Public Service, TransCanada, VF Corp., Weyerhaeuser, Madison Square Garden, Aon and Calpine.

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The market's declines Thursday were led by the small-cap Russell 2000, down 2.2 percent and the Nasdaq, down 1.6 percent.

"It feels like for a lot of momentum names, there are some that are bent, and some are broken. As for the bios, at this point, they're oversold but this doesn't mean it's a bottom for the group," said Redler.

Traders have been watching the iShares Nasdaq Biotechnology ETF IBB this week, as a potential signal for momentum stocks overall and for the broader market. The IBB fell through its 50-day moving average and was hovering just above its 100-day. The Global X Social Media Index ETF SOCL was 2.3 percent lower Thursday, and it could fall further Friday after LinkedIn dropped about 20 percent in late trading after disappointing earnings. LinkedIn follows Twitter and Yelp, which also declined sharply on disappointing earnings news.

"There's definitely question marks about whether this selloff will be deeper than what we've seen so far in 2015. At this point, people are more defensive versus risk on. The question is will there be downside follow through," said Redler. "Two weeks from now, it feels like we'll be lower rather than higher. It feels like we need to see 2040/2050 on the S&P before we see new highs."

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Traders entered the week watching the S&P 500 to see if it would extend gains from record highs, but instead of breaking out, the index came off its highs Monday in an outside day, signaling more declines.

Scott Wren, senior equity strategist at Wells Fargo Investment Institute, said he does not see the current rout as a precursor to "sell in May" behavior. That's the old Wall Street adage that the stock market is weak in May through October, and traders should sell in May and then go away until the fall. The market's performance is typically better in November through April.

"Biotechs, based on our work, were overdone to the upside. Clearly health care has been a good performer," Wren said. "Probably 80 percent of the performance of that group has been solely due to the biotechs … it's very stretched."

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Wren said he thinks the market is close to fair value currently, and he expects the S&P to reach his year-end target of 2250. He said the market could still be reacting to Wednesday's disappointing first-quarter GDP growth, up just 0.2 percent.

But he also noted that the employment cost index Thursday showed a healthy gain of 0.7 percent, suggesting the potential for wage inflation. That number and a drop in jobless claims to a 15-year low also stirred speculation that the Fed could have to respond to the strengthening job market and wage inflation with interest rate hikes.

Financial markets diverged Thursday, amid crosscurrents from mixed economic data showing a healthier labor market but wobbly economic growth. The dollar was weaker against the euro, while Treasury yields were higher much of the day, following European yields. Stocks were lower from the opening bell.

Traders in all markets are waiting for next Friday's employment report as the next clue on Fed policy after this week's Fed meeting failed to provide any further guidance on the timing of a rate hike. The street expects the first hike as early as September but puts a higher probability on December.

Disclosure: CNBC's parent, NBCUniversal, is a minority investor in Kensho.