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Oil could be biggest factor as traders await Wal-Mart, CPI

Oil could keep a tight grip on the stock market Tuesday, as traders also watch inflation data for what the figures might say about the Fed.

There are also some major retail earnings, including Wal-Mart, Home Depot, TJX and Dick's Sporting Goods.

Stocks and bonds Monday confounded strategists who had expected a flight-to-quality trade, after coordinated terrorist attacks in Paris left at least 129 dead and dozens injured.

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

On Sunday evening, stock futures plunged but recovered, and the market seesawed before rallying hard Monday afternoon. The S&P ended up 30, or 1.5 percent, at 2,053. U.S. oil futures, which also moved lower temporarily, ended up finishing the day with sharp gains of 2.5 percent, at $41.78 per barrel. Stocks rallied along with crude, and Exxon and Chevron had the most positive impact on the Dow.

"I think (the stock market rally) has more to do with how much it went down last week in one of the most significant pullbacks since it came off the lows," said Jim Paulsen, chief investment strategist at Wells Capital Management. "As bad as it was in Paris, I don't know if it will have that much fallout on the economy." The S&P 500 was off 3.6 percent last week, and West Texas Intermediate crude futures were down 8 percent.

In the bond market, the two-year yield was higher, at 0.84 percent. The two-year is the most sensitive to Fed policy. Even though stock traders speculated terror attacks could hold off a U.S. central bank rate hike, the bond market traded on the view that the Fed is likely to raise rates in December.

Read MoreFed will not be deterred from hiking rates

"Today was a kind of 'scratch your head' day," said Justin Lederer, interest rate strategist at Cantor Fitzgerald. "I think (the bond market) is saying December is clearly in play but rate hikes going out are going to be a slower trajectory so the belly of the curve doesn't have to spike to higher yields."

Oil teetered Monday on the $40 level, but WTI futures did not break below it. The level is seen as psychologically key, and a settle below it would have been taken as a negative in the stock market. Oil's low of the year was $37.75 per barrel.

"Oil is sort of testing its technical boundaries. Leading into this, before Paris, it was testing the lows of the years," said Paulsen. The events in the French capital put a geopolitical premium into oil, which also moved higher on a report of lower OPEC output and on short covering. "It stopped going back down into the $30s. Once it starts going up, everybody piles in, and that could be the same thing that happened in stocks."

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The consumer price index is reported at 8:30 a.m. EST Tuesday, and industrial production for October is at 9:15 a.m. The NAHB homebuilders sentiment survey is released at 10 a.m. and Treasury International Capital flow data are disclosed at 4 p.m.

CPI is expected to rise 0.2 percent after a decline in September.

"Right now, if you were to get a 0.3 rather than a 0.2, I think that would be noticed on top of the wage numbers," said Pauslen. "It feels a little bit like ... it's a situation where the Fed is going to be forced to tighten because the nominal wages are rising against a backdrop of weak growth everywhere."

Read MoreManufacturing is clearly in recession

The strong October jobs report was a turning point for the market. There were solid payroll gains but also the 2.5 percent year-over-year increase in wages encouraged Fed watchers to expect a rate hike in December.

"I personally am going to be watching the CPI because there are so many technical things in play. Oil is huge at the moment. The dollar is huge at the moment. The dollar index was within a point of breaking out to new highs," said Paulsen, adding he's also watching the spread between 10-year Treasurys and German bunds and the widening of high-yield credit spreads.

The bund was yielding 0.52 percent, while the U.S. 10 year was at 2.26 percent late Monday. The dollar index was at 99.46, less than a point below the March high of 100.39, a key level traders have been watching.

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"Today looks like a (stock) bounce off a bad week last week. Let's see how the rest of the week goes," Paulsen said.

There are several Fed speakers Tuesday, with Fed Gov. Jerome Powell at 12:35 p.m. at the Clearing House Annual Conference. Fed Gov. Daniel Tarullo pseaks at 3:30 p.m. on the financial system and shadow banking. Former Fed Chairman Ben Bernanke speaks at 4:10 p.m. at Brookings on the financial system, post-crisis.

Read MoreParis attacks unlikely to cause correction: Wilbur Ross