If Market Follows January Trend, Bulls Could Declare Victory This Year

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A major wave of earnings news Thursday could keep the tug-of-war going between Wall Street's bulls and bears.

Stocks slumped Wednesday, as the books were about to close on January -- so far the best January for the S&P 500 since 1997. On Wednesday morning, stocks overcame the first negative GDP print in more than three years, as many economists expected a positive revision in coming weeks and blamed the surprise 0.1 percent contraction in the fourth quarter on a big drop in defense spending and inventories.

(Read More: Why This Is 'Best-Looking' GDP Drop You'll Ever See)

The dip in defense spending came after a stronger third quarter for defense, and the decline was seen as the result of winding down war spending in Iraq and Afghanistan. It was also seen as possible advance activity ahead of the 'sequester,' the automatic cuts to defense and other government agencies that comes March 1 if Congress does not act.

"The fact inventories collapsed tells me demand was bigger than investors expected. On the manufacturing and cap ex output side, you're probably going to see a bounce in Q1," said Larry Kantor, director of research at Barclays.

Stocks fluctuated but finished the day lower, after the Fed released a statement providing little new information. Fed officials did point out that economic activity "paused in recent months" due to weather and temporary factors. They also said they expect economic growth to continue at a moderate pace and the job market to improve, as they kept their $85 billion a month asset purchase program in place.

(Read More: Fed Hawk Voices Doubts Over Benefits of Bond Buying)

Art Cashin, director of floor operations at UBS, said stocks had an interesting finish Wednesday. He said there was a surge of buy orders –as much as $1 billion more to buy than sell- at the close, but the headlines of an Israeli attack on Syria weighed on sentiment and prices. "The market on close buyers are all playing the multinationals," he said.

So Goes January

The old trading adage – so goes January, so goes the year – does ring true when you look at the numbers. According to Howard Silverblatt of Standard & Poor's, stocks have moved for the year in the same direction as January in 61 of the last 84 years, or nearly 73 percent of the time.

While the S&P fell 5 to 1501 Wednesday, it is up 5.3 percent for the month so far. The Dow fell 44 to 13,910 Wednesday, but it is up 6.2 percent for the month, its best January since 1988. The Nasdaq was off 11 at 3142 but is up 4 percent for the year.

(Read More: S&P Tops 1,500: Where the Market Goes From Here)

"It's going to take some really bad news to push this market down a lot," said Randy Frederick, managing director of active trading and derivatives at Charles Schwab. "I do think a short term correction is due. I could see a three or four percent correction at most. Then I think we take off to new highs."

Dan Greenhaus, global market strategist at BTIG, said the market is beginning to look a little tired.

"Clearly, we're having trouble at 1500, and I guess on the Dow – 14,000. That number means nothing technically, but obviously it's a psychological number. Round numbers give people problems," he said. He said the market is beginning to look toppy and noted that 82 percent of the NYSE stocks are above 200-day moving averages.

Greenhaus said he'd like to see the market blow off some of its steam before heading into Washington's discussions around the sequester. While traders are increasingly betting the sequester could go into effect, he said the market isn't really expecting it, and the discussions could cause turbulence.

(Read More: Kudlow: Spending Sequester Will Grow Private Economy)

For instance, he said he has followed defense companies and listened to their conference calls, but they are not seriously discussing the potential detailed impact of the sequester budget cuts. Therefore, the market may be unprepared if the sequester happens. Defense stocks have risen right along with the market as a whole and are up 18 percent from their June low, he added.

Gasoline Getting Fired Up

RBOB gasoline futures are up nearly five percent this week and 9.8 percent in the month of January. WTI crude is up two percent for the week and 6.7 percent in the month of January, while Brent is up 3.5 percent for the month.

That is already pinching at the pump, with gasoline jumping three cents between Tuesday and Wednesday, to a national average of $3.39 per gallon for unleaded gasoline, according to AAA. In the last week, unleaded gasoline has risen eight cents per gallon.

(Read More: How Futures Pros Are Trading the Gasoline Rally)

Andy Lipow, president of Lipow Oil Associates expects to see another quick 10 cent per gallon rise in the next week or so. "They are going to be rising pretty substantially in the next couple of days. We've seen crude oil prices have been steadily rising. They're up $12 a barrel over the last couple of weeks and in addition to that, the announced closure of the Hess Port Reading refinery has the market quite concerned about the price of RBOB in the northeast," he said.

What to Watch

Weekly jobless claims, reported at 8:30 a.m., are expected to show a jump to 370,000 after two weeks of unexpected low numbers of around 330,000.

Credit Suisse economist Jonathan Basile is also watching personal spending, which he said could be the highest level in years, on par with the record 3.4 percent gains in December of 1992 and 1993. "We think it's going to match a record monthly gain…mainly because of the special dividend payouts," he said. Companies paid out billions to shareholders in the fourth quarter, as they attempted to get ahead of a dividend tax increase January 1.

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Other data Thursday includes the Employment Cost Index at 8:30 a.m. and Chicago PMI at 9:45 a.m.

There are earnings reports expected from Deutsche Bank, Altria, UPS, Blackstone, Dow Chemical, MasterCard, Royal Dutch Shell, Aetna, Under Armour, Time Warner Cable, Diageo, Honda, AstraZeneca, Coldgate-Palmolive, and Nasdaq OMX before the open. Other companies reporting include Mead Johnson, Potash, NuStar, Consolidated Energy, Occidental Petroleum, Energizer, Meritage Homes, Ryder Systems, Sherwin Williams and Tehrmo Fisher Scientific.

Companies reporting after the bell include Chubb, Eastman Chemical, Fortune Brands, McKesson, PerkinElmer, Wynn Resort, CR Bard, Manitowoc, and Reinsurance Group of America.