Stocks could give back more gains this week as traders keep a wary eye on the strengthening dollar.
The Fed starts a two-day meeting Tuesday, and there are just a few economic reports, including productivity and costs at 8:30 a.m., and wholesale trade at 10 a.m. The NFIB's small business survey is reported at 7:30 a.m.
Traders are also watching the Treasury's auction of $37 billion in 3-year notes at 1 p.m. On Monday, stocks sold off slightly, while the bond market saw buyers in thin volume. The dollar gained for a third day against a basket of currencies. Commodities, especially gold and other metals, moved lower.
"The bears held themselves together. The dollar started to exert its influence," said Art Cashin, director of floor operations at UBS. He said stock market bears though won't have an advantage as they head into Tuesday, and right now it's a toss up as to which direction dominates.
"The stock market benefited greatly from weakness in the dollar. It would seem natural that if it were to rally, it would put pressure on stocks," said Cashin. The dollar staged an interesting intraday reversal Friday after better than expected jobs data, sparking a debate about whether the dollar is now going to trade along with perceived relative strengthening in the U.S. economy instead of against the idea of recovery.
Cashin said it is important to see whether the dollar's rise is more than a short-lived phenomena and how other financial markets relate to it. As the dollar firmed Monday, stocks and assets that rode higher with it, weakened. The commodities-related materials sector was the worst performer, down 1.6 percent. Second worst was consumer discretionary, down 1.2 percent, followed by a 1.1 percent decline in industrials, another group sensitive to the global reflation trade.
The dollar index was 0.3 percent higher at 79.212. It was also 0.3 percent higher against the euro, at $1.4142. Traders were also watching the Chinese stock market, down for a fourth day and another metric for the global economic recovery.
Some of the talk around stocks this week has been about consolidation, after last week's 2 percent gain. The Dow Monday finished off its highs, down just 32 at 9337, and the S&P 500 was off 3 at 1007.
"I think we get a small pull back here, but I don't think the rally is finished," said John Roque, managing director with WJB Capital Group.
Roque said the S&P 500could head to 975 from its current level, but would then continue to move higher, towards his target for the current rally of 1125. "I think sell off might be too harsh a word," he said.
"The technical indicators are pretty darn strong. Unless they deteriorate quickly, it would be hard to make a call that they are going to revert downward," he said, adding he will watch the market's consolidation to see how much the internals weaken during it.
Andrew Burkly, technical strategist at Brown Brothers Harriman, said he too sees a slight pull back. "I wouldn't be surprised to see a kind of 5 percent dip in the next week," he said.
But he expects stocks to move higher after that. "I still think we're probably seeing 1030 to 1050... We're seeing a little bit of selectivity as far as stocks participating. Overall the internal indicators and volume suggest making a new high, and this leg isn't done yet," he said.
Once the fall approaches though, expect some turbulence. "The first correction I would count on going 15 to 20 percent, and that's a couple of weeks to months away," he said.
Bonds traded higher and yields fell along the curve Monday.
"It's a summer Monday. Volume is 60 percent of the normal. It is the summer doldrums. Liquidity is as thin as good opinion about the market, so it doesn't take too much to really push prices and make it look exciting," said David Ader, who started Monday as head of government bond strategy at CRT Capital.
He said besides the auctions, the markets are watching the Fed this week. "I expect on Wednesday the Fed is going to say we are done with quantitative easing, meaning when this cycle is completed," he said.
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"There seems to be enough green shoots, enough stability that the Fed would want to husband its money and if it wanted to intervene down the road, they could do it. I think one of the things supporting the dollar is the market place in general and overseas investors think they're serious. They're not going to continue with QE," he said.
"...Real yields minus inflation in the U.S. are extremely high on a historic basis against the rest of the world...You put all this all together and there are reasons he dollar should be doing a little bit of improvement. It's not dramatic," he said.
The Treasury auctions this week include $23 billion in 10-year notes on Wednesday and $15 billion in 30-years on Thursday.
What Else to Watch
Larry Summers, President Obama's chief economic adviser, speaks at noon at a National Bureau of Economic Research event. He is expected to speak for 30 minutes and then take questions for another 30 minutes.
President Obama participates in a town hall on health care in New Hampshire.
General Motors holds an 8 a.m. press briefing.
Frank DiPascali, who helped run Bernard Madoff's investment advisory operation, is expected to plead guilty to fraud and could become a central witness against others in the fraud case.
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