The S&P Wednesday morning hit Tuesday's intraday high of 1687 before selling off, giving it an "outside day." "You had a fast, furious move above yesterday's high, so that basically made the shorts capitulate and people chased excitement, and then you fell back below that level," said Scott Redler of T3Live.com. He said an outside day can lead to a short-term directional change.
"I don't' think the highs of the year are in yet, but I think both the bulls and bears would welcome a three-to-five percent correction here. We've been extended for a long period of time. You never know what this kind of day will lead to," he said.
Redler said now it will depend on how the market trades. "If we don't get a potent bounce in the next day or two, we could see it continue," he said.
The Treasury market saw one of its biggest days in terms of volume in years. David Ader of CRT Capital did a quick look back over four years of volume data, and he couldn't find as big a day. He said volume was about 180 percent of the 10-day average.
"Everyone has been long mortgages…now all of a sudden, you throw a wrench in the works where the Fed might, instead of buying all of the mortgages, would be buying say 80 percent. So, you have people spooked," said Ader, chief Treasury strategist at CRT. He said there was panicky selling in that market, which spilled into Treasurys.
(Read More: Paulson Raised Bet on Mortgage Insurers in First Quarter Filing)
"It's a hedge and you have another major fixed-income instrument selling off. We're not going to stand still when something as big as mortgages are selling off. We're going down in sympathy," he said.
He said the uncertainty about the Fed, and the possibility it could ease sooner than expected could keep rates higher for now. "The Fed's going to be tempered here, and we still have ambiguity. For the moment, it's going to lift the (yield) range a little bit," Ader said.
"We are addicted to the Fed, and the withdrawal process is going to be painful, and I think the Fed has an interesting time ahead of it…the move for stocks today was not a happy camper," he said.
Canally said the 2 percent 10-year yield spurred talk that corporations would cut back on debt issuance, which some have been using to buy back stocks. That would be a negative for the market, he said.
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Ader said a 2 percent yield might be enough to draw in Japanese buyers who were waiting for an opportunity to put more money into U.S. government bonds. "We've been speaking about this for a week. The currencies are favorable now too," he said.
What Else to Watch
St. Louis Fed President James Bullard speaks at 6:05 a.m. in London on monetary policy and the economy. Bullard's comments endorsing continued easing earlier this week were market moving.
There are a number of earnings ahead of the opening bell, including Dollar Tree, ING U.S., Toronto Dominion, Sears Holdings, Ralph Lauren, Hormel Foods, The Buckle, Advanced Auto Parts and Patterson Cos. Gap, Salesforce.com, Williams-Sonoma, Zumiez, Pandora and Aeropostale report after the closing bell.