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Stocks could shake off oil funk

Falling oil prices sent stocks reeling, but analysts say the market could fend off a bigger swoon for now, if simply because of the time of year.

The S&P 500 tumbled 33 points or 1.6 percent to 2026 Wednesday, as West Texas Intermediate futures for January plummeted 4.5 percent to $60.94 per barrel. The $60 level has been psychological import, and analysts say prices could keep falling.

"With three weeks left in the year, these are precious dollars for portfolio managers," said Peter Boockvar, chief market analyst with the Lindsey Group. "I think that's helped exaggerate every move. It's exaggerated oil and gas, as everyone clears their books and takes tax losses. There's an underlying fragility here that the drop in oil prices is bringing to light."

Boockvar said the market could be lifted by year-end window dressing, but could then be forced to pay up later: "This is highlighting that the earlier part of the year is going to be a challenge."

Read MoreWith $60 oil, expect some US shale restructuring: Analyst

Besides oil prices, traders will be watching key U.S. retail sales data Thursday, expected at 8:30 a.m. ET. Retail sales should show the benefit of falling energy prices, and should give more clues about how well holiday sales are faring. Weekly jobless claims and import prices are also expected at 8:30 a.m. Business inventories are due at 10 a.m.

Oil was slightly higher Thursday evening, after plummeting during the trading day. U.S. stock futures were barely changed, but edged higher in evening trading.

Crude prices fell sharply Wednesday after OPEC (Organization of Petroleum Exporting Countries) cut its 2015 demand forecast to a more than decade low, and U.S. oil supply showed a surprise increase. Saudi Arabia also dismissed talk of production cuts. http://www.cnbc.com/id/20409666

The $60 level raises concern about the weakest oil companies in the shale industry, which are those with higher debt levels and that need higher prices than competitors to operate.

"We think WTI has a risk of going to $50 and Brent breaking through to $60," said Francisco Blanch, head of global commodities research at Bank of America Merrill Lynch. Blanch said the trough for prices should come in the early spring, due to seasonality with the market possibly weaker because of inventories.

He does not expect oil to stay at that low $50 level for long, but it could move in a range up to $70 a barrel. "We're seeing capex cuts. I think a lot of companies are in a wait-and-see mode. For the time being, a lot of players are delaying their response…We think six to nine months is the time it will take for supply and demand to adjust."

Blanch said he doesn't expect OPEC to move to raise production, after voting to hold quotas steady at its November meeting. That set off a cascading in prices, and now the market is watching to see if U.S. shale producers cut back, reducing world supply or if OPEC will be forced to move.

Read MoreFear indicator spikes as traders get 'skittish'

"I think Saudi will move at the end of the day, though on its own," Blanch said. "They're playing poker. This is a game of volatility. The high and stable oil price that the Saudis manufactured for the previous four years, it didn't really help them very much. It created a lot of money, but it created a lot of competition."

He said the Saudis are now flush with cash and can afford to wait out market turmoil. "We could end up seeing a lot of volatility, which is to the benefit of the Saudis. It's the producer with the lowest costs from an actual production standpoint, and it has the strongest balance sheet," Blanch said.

In Thursday's sell off, energy ETFs were hit hard on high volume. The Market Vectors Oil Services ETF (OIH) fell 3.5 percent Thursday, while the Energy Select Sector SPDR Fund ELP fell 3 percent.

Traders work on the floor of the New York Stock Exchange.
Getty Images
Traders work on the floor of the New York Stock Exchange.

Many on Wall Street had expected an easy ride for stocks into the end of the year, with a Santa rally capping a year of gains. But the mood has soured this week, as crude sold off, and energy stocks with it. There have also been new fears about Europe, with Greece's upcoming election next week, and China's economy.

While stocks sold off, bond yields continued to head lower. The 10-year was at 2.15 percent late Thursday.

"Rates are falling because of incredible demand from overseas and policy overseas," said Rick Rieder, CIO fundamental fixed income at BlackRock. "The European Central Bank (ECB) is very easy, the Bank of Japan, the Bank of China are now very easy, and so the U.S., at interest rate levels that are historically very low for the U.S., are quite attractive when German bunds are 70 basis points and Japanese government bonds are in the 40s. So the U.S. becomes the most attractive interest rate instrument in the world - 10-year Treasurys do."

Rieder said he thinks rates could drift higher but not much, and the low interest rate environment will be around for a long time.

On Thursday, traders will again watch yields in Europe, as the ECB offers a second tranche of cheap loans to banks, in an effort to spur lending. The issue is whether the ECB can successfully attract banks to the program, after a disappointing first attempt.

Read MoreEnergy sector could surprise in 2015: Lee

Stocks could continue to struggle. Japan's Nikkei was down as much as 1.5 percent in early Thursday trading after machinery orders fell 6.4 percent, worse than the expected 2.4 percent decline.

Patrick Boyle, managing director with BTIG, said the U.S. market tried to pull out of the doldrums Wednesday but failed: "I'm not saying this is the beginning of a sell off. It's just back and fill here."

Boyle said traders have been getting burned on oil plays: "People were talking about buying distressed energy in here. There were a lot of people getting in in the last couple of days, and they took it in the teeth today."

Scott Redler, partner with T3Live.com, said he's watching 2015 on the S&P 500. "We're coming into some pretty big levels that I'm going to try to buy. You have 2015 which is the old high. We could retest it if we have a down open tomorrow. If there's any chance for Santa Clause to come ringing his bell, the market's got to hold 1997 and 2015. That's going to be a critical area to hold to get some footing for a potential rally."

Just several days ago, the market was buzzing with talk about Dow 18,000. The Dow lost 1.5 percent to 17,533 Thursday.