Stock Market to Navigate Negatives of Earnings and Economy

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With earnings season a potential negative for stocks, traders are even more vigilant than usual for news on the direction of the economy..

Alcoa was the first blue chip of the first quarter earnings season to report Monday afternoon, and it's seen as a sort of earnings bellwether. The company's stock fell in afterhours trading after it reported an increase in profits to $149 million, or 13 cents per share, but revenues of $5.83 billion, just shy of analysts' expectations for $5.88 billion.

(Read More: Alcoa Earnings Beat, Outlook Improves)

The earnings season arrives just as March economic reports have begun to flash warning signs about the second quarter's growth, so corporate earnings comments will be critical this quarter for the clues they give for future earnings. Already about a fifth of the S&P 500 companies made negative preannouncements ahead of the first quarter reporting season.

Worries about a spring slump has cast a cloud over markets and helped drive a rally in Treasurys in the last week. Friday's report that just 88,000 nonfarm payrolls were added in March was the most significant piece of data fitting into the weakening trend. Jobless claims last week were also disappointing, rising to 385,000, the highest since November.

"I think right now the market would be most vulnerable to jobless claims making a multi-week climb. I don't think earnings numbers are going to be bad enough," said James Pauslen, chief investment strategist at Wells Capital Management.

Earnings for the S&P 500 are expected to increase 1.6 percent for the quarter, according to Thomson Reuters. The big rush of earnings reports begins next week, after just a trickle this week. Major banks J.P. Morgan and Wells Fargo report Friday.

(Read More: Pimco's Bill Gross: Beware of 'Monetary Red Bull')

"I think part of what's going on here is we're right at the 'sell in May and go away' mentality at its maximum," said Paulsen. "It's more about the fact that for three years running, you sold in May and went away. I don't think we're going to get that this year." He said were it not for the spring swoons in stocks and the economy in the past three years, stocks might not have had such a negative initial reaction to the jobs number.

As of Monday, the market seemingly managed to shrug off the poor jobs report, finishing with gains. Stock futures were slightly higher Monday evening, after the Dow closed the trading day at 14,613, up 48, and the S and P 500 at 1563, a gain of nine points.

Part of the reason the stock market took the jobs report in stride is that economists say the employment picture is not as dire as the data might make it seem, even if the second quarter slowdown is real.

"The trend in the first quarter was 168,000 (jobs) per month. February was unusually strong. March was unusually weak…Some of that would lead us to downplay the actual level of 88,000," said Dean Maki, chief U.S. economist at Barclays. "But I do think there's a message in the data that there's a slowdown coming in the second quarter in terms of growth. We think first quarter growth was 3.5 percent but that's going to slow to 1.5 percent in the second quarter."

(Read More: How to Prepare for a Spring Swoon in Stocks)

What to Watch

There are just a few economic reports Tuesday, including the NFIB small business survey at 7:30 a.m. ET, wholesale trade for February at 10 a.m. and the Labor Department's job openings and labor turnover survey (JOLTS), also at 10 a.m. There is a $32 billion 3-year note auction at 1 p.m.

On Tuesday, there are also some Fed officials to watch, including St. Louis Fed President James Bullard, who will be on "Squawk Box" at 8 a.m. ET with CNBC's Steve Liesman. Other Fed speakers include Richmond Fed President Jeffrey Lacker, who speaks on "too big to fail" banks at 9:30 a.m., and Atlanta Fed President Dennis Lockhart, who makes opening comments at the Atlanta Fed conference at 1 p.m.

Maki said he expects the JOLTS report to show the same message it's been showing. "There are just as many job openings in the U.S. economy right now as when the unemployment rate was at 5.5 percent in the last cycle. What the data are telling us is there is not a lack of job openings but a mismatch of skills," he said. There were 3.7 million job openings on the last business day of January, flat with December. The hires rate was 3.1 percent and separate rate was 3 percent.

The employment picture is key to markets since the Fed has indicated the health of the jobs market will be a factor in its decision on when to end its quantitative easing program and begin the move toward raising interest rates. Fed Chairman Ben Bernanke, speaking on bank stress tests Monday evening, repeated that economic conditions are far from where the Fed would like them to be.

The softer jobs report also reaffirmed that the economy is weakening and has convinced traders that the Fed will not stop easing any time soon. That contrasts to the days before the March report, when the markets were on edge after mixed signals from different Fed members on when the Fed should start to taper its easing programs.

Maki said he expects to see job growth of about 150,000 for the next couple of months, and a monthly pace of 175,000 in the second half. He expects growth to see growth pick up to 2 percent in the third quarter.

Economists say part of the reason for the stronger first quarter was inventory building which had stalled in the fourth quarter. The economy has slowed in the spring in each of the last three years after starting the first quarter on stronger footing.

The second quarter will also likely feel more of the effects of spending cuts in Washington, from the automatic reductions from the sequester.

(Read More: Why Washington Can't Stop Its Spending Habits)

Diane Swonk, chief economist at Mesirow Financial, said she expects growth to recover in third quarter to 2.8 percent, a better pace than many economists expect. "I think the sequester is going to be cut short. If we get something reasonable, I think it's going to be a rallying point," she said, noting there seems to be movement in Washington on budget negotiations.

President Obama Wednesday will send his budget plan to Capitol Hill, and it is expected to include cuts to entitlement programs, in an effort to show a willingness to compromise with Republicans.

Traders will also be watching the sideshow at J.C. Penney after CEO Ron Johnson was ousted and Mike Ullman will rejoin the company as CEO. The stock was volatile in afterhours trading, first rising on the news before dropping nearly 10 percent.