Wall of worry for stocks just got higher

Markets are starting off the new year with a bang.

U.S. stocks plunged in a global equities sell off that started with a report showing a tenth month of decline in Chinese manufacturing. A weak U.S. ISM manufacturing report showing more contraction than expected Monday morning gave stocks another kick lower, with the Dow losing as much as 400 points.

Already there were hangovers from the old year — like concerns about oil oversupply, weak global growth and how frequently the Fed will raise rates. There's also the unexpected sharpening of tensions between Iran and Saudi Arabia over the weekend, following Saudi Arabia's execution of a Shia cleric.

Iranian protesters burned and attacked the Saudi embassy in Tehran, and Saudi Arabia cut off diplomatic relations with Iran. Oil rose as a result, with international benchmark, Brent crude, up 4.3 percent Monday.

"It's is a wake up call to the growing geopolitical and economic uncertainties around the globe," said Sam Stovall, chief equity strategist at S&P/Capital IQ.

A trader on the floor of the New York Stock Exchange, Dec. 31, 2015.
Lucas Jackson | Reuters
A trader on the floor of the New York Stock Exchange, Dec. 31, 2015.

Shanghai stocks sold off 7 percent before being halted.

"China I think is one of the risks to the global economy," said Russ Koesterich, global chief investment stratgist at BlackRock. "I don't think the sell off of the Chinese stock market is fundamental for U.S. investors but it clearly affects sentiment."

Koesterich said some of the selling in Shanghai was technical, as restrictions on selling and other measures that were put in place during the summer selloff were being lifted.

He expects more China related sell offs in the future. "It's one of the things that's going to erupt over the next couple of years as the economy transitions. It's going to be more a source of volatility than one that mitigates it," he said.

Traders traditionally look to the first trading days of the year for clues about monthly and annual performance. There's the old Wall Street adage - 'so goes January, so goes the year.'

But Stovall said January has often been a rough month for stocks, and stocks rarely just move higher during the year. The S&P 500 has reached a lower level than where it started out the year 87 percent of the time since 1945, he said.

"One-third of all year-to-date lows were established in January," he said, noting the next highest month was October at 13 percent.

Stocks closed out a dramatic but ultimately, unsatisfying 2015, with the market selling off into the close on its final trading day, turning in a sluggish and mixed performance for the year.

The S&P 500 and Dow had their worst years since 2008. The S&P closed at 2,043, a decline of 0.7 percent, a second negative year since 2008, following on the even slimmer 0.003 percent decline of 2011. The Dow was down 2.2 percent at 17,425, but the Nasdaq was a bright spot, closing up 5.7 percent at 5007. A CNBC survey of 14 Wall Street strategists shows they expect relatively modest single-digit gains in 2016, with the S&P 500 expected to rise to an average 2,213.

Treasury yields were lower Monday as investors sought safety during the equities rout.

There's plenty for the bond market to consider this week including the Monday release of disappointing ISM manufacturing data, which came in at 48.2. There are also Fed meeting minutes and trade data on Wednesday, and the December employment report Friday. There are also about a half-dozen Fed speeches.

"It's the typical beginning of the month, reports coming in and people looking for a fresh start on a new year. January typically long term has been a relatively strong month, but in the more recent years, the returns haven't been that great," said Paul Hickey, co-founder of Bespoke. "Last year, we (stocks) were down 3 percent, and the year before down 3.5 percent, and 2013, up 5 percent. The last two years have been really weak so I don't think people are looking for too much."

Read MoreLots of fireworks but no grand finale for stocks

Then there's the unexpected factors, like the events that notched up tensions between Saudi Arabia and Iran.

Oil was one of the biggest factors impeding stock market gains in 2015, leaving the S&P 500 flat and lower for the year. The outlook for oil has been for another move lower, due to global oversupply, but oil futures were rising since they opened Sunday night on the Mideast tension.

"All of this pits the Gulf region's largest producers against each other to the point of conflict," said John Kilduff of Again Capital. "The stakes are, obviously, tremendous. A quick climb down (in oil prices) looked likely until the Saudi move. This is potentially a very largere-inflation of oil's security price premium."

Economists expect to see 200,000 nonfarm payrolls Friday, just below the 211,000 jobs in November, and an unemployment rate unchanged at 5 percent. Because of a weak comparison, economists expect that average hourly earnings could increase by as much 2.8 percent year over year, higher than the recent trend.

"I think the theme we're going to see in the first half of the year is that the labor market is still doing reasonably well but other parts of the economy are more mixed. We should have good construction data, decent vehicle sales but you're going to have weakness in net exports and weakness in manufacturing," said Deutsche Bank chief U.S. economist Joseph LaVorgna. "The question is how much of that spills into the nonmanufacturing sector."

LaVorgna expects growth to pick up to 2 percent in 2016 after a weaker fourth-quarter pace, running at about 1.5 percent.

Read MoreDon't forget about manufacturing: Economist

The stock market's gains were repeatedly choked by oil's greater-than-expected decline in 2015. Oil's stronghold on other markets foiled the expectations of stock strategists that had forecast the S&P would rise to about 2,200 in 2015, according to an earlier CNBC strategist survey. The S&P 500 is now 4.3 percent below its all-time high of 2,134 reached in May.

The dollar also was a culprit, biting into overseas profits of U.S. multinationals and hurting commodities and emerging markets. The dollar index was up 9 percent in 2015, but analysts expect the impact on corporate earnings to lessen in 2016.

"For next year our (S&P) target is 2,200 for year-end 2016. We're calling for modest gains," said Jill Carey Hall, equity strategist at Bank of America Merrill Lynch. "We're forecasting earnings growth of 5 percent. That's a pickup from flattish earnings growth this year. … Earnings for the multinationals should see fewer headwinds."

Read MoreAnalysts' top sectors and stock picks for 2016

Stocks stuck

Scott Wren, senior global equity strategist with Wells Fargo Investment Institute, said he expects the market to continue moving higher in 2016 even after a flat year. "Our analysis has shown that the market should finish higher. We wouldn't be surprised to see fairly quickly in the new year a new high in the S&P," he said. He sees the nearly 7-year-old bull market as being in the equivalent of a "seventh inning" of the nine, played in baseball.

"We're still leaning toward sectors that are more sensitive to the recovery here and aboard. Consumer discretionary, technology and we continue to like industrials. What we don't want clients doing is things like getting defensive in utilities and staples," said Wren. He expects the S&P to reach 2,280 at year-end 2016.

Traders had been watching the S&P into the year end, with an eye on 2011, the last flat year. "If the 2011 playbook is correct, we should have a strong first quarter. The market had a good move," said Scott Redler, partner with T3Live.com. The S&P was up 13 percent in 2012.

Read MoreThe 2016 Dogs of the Dow

Redler watches the market's short-term technicals and said 2015's volatile trading left the market feeling a lot more bearish then bullish.

"The question is whether the indices masked a lot of the weakness under the surface," he said.

If the S&P gets above 2,080, it would encourage buying, and a close above 2,103 would confirm upside bias, helping the market regain its highs, he said. But if the market moves lower, a close below 2,022 would be the first clue, and if it continued to sell off, the down move could take the S&P toward 1,950 or the 2015 lows of 1,840.

Apple is also a problem for bulls and it could keep pressure on tech, Redler said. Technically, the stock looks like it could weaken further. The one time darling was down 4.6 percent for the year, its first negative year since 2008.

Read MoreApple turns in first negative year since 2008

Commodities crush

The selloff in commodities, particularly oil, was among the more dramatic market developments of 2015, with crude, gold, silver adding another year of steep losses, for the longest losing streak since 1998. West Texas Intermediate oil down 30 percent for the year at $37.04.

Selling pressure is expected to remain, and traders are watching Wednesday's 10:30 a.m. ET government inventory report to see if oil supplies continue to build as they did in the past week. Even with Mideast turmoil, West Texas Intermediate crude futures were up 2.8 percent, less than some recent intraday moves.

Oil's decline was a big weight on stocks in the past year, knocking 60 percent off energy profits and sending the S&P energy sector down 24 percent for the year. It was the weakest sector followed by materials, which fell 10 percent.

Crude's losses were also the result of a stronger dollar, which also wreaked havoc on emerging currencies. The dollar was up more than 20 percent for the year against the Russian ruble, Brazilian real and Turkish lira, to name a few.

Read More'Shotgun weddings' in energy to boost M&A in 2016

Fed Ahead

At the end of 2015, the 10-year was yielding 2.26 percent, just slightly above the 2.17 percent it was at a year ago. It was at 2.21 percent Monday.

In the two weeks since the Fed hiked rates, the 2-year yield has stretched up to as much as 1.10 percent, a five year high. The curve has continued to flatten, as the longer duration securities like 10-year notes see yields rise at a slower pace than the Fed sensitive short end.

Trading should be much the same next year, according to Ian Lyngen, senior Treasury strategist at CRT Capital.

"Ironically we're not looking for anything more significant than we were looking for in 2015, namely a wide range, choppy price action, a fair amount of volatility, illiquid conditions exaggerating the volatility and a slow upward drift in the front end of the curve," said Lyngen. Lyngen said the coming week's data and Fed speakers are important, but the bond market will wait to see a few jobs reports before making bets on the next Fed rate hike.

The Fed has forecast four hikes for 2016, but the market expects about half that amount. "Cooler heads will prevail in the Treasury market after we get a couple of employment reports, and we're closer to pricing in the Fed's rate hikes," said Lyngen.

Read MoreChart: CNBC's Market Strategist Survey 2016

What to watch

Sunday

11 a.m. ET: San Francisco Fed President John Williams speaks on the equilibrium real interest rate at a panel discussion at the AEA Annual Meeting in California.

1:15 p.m.: Fed Vice Chair Stanley Fischer speaks on what's next in central banking at a panel at the AEA Annual Meeting in California.

5:30 p.m.: Cleveland Fed President Loretta Mester speaks on the U.S. and global economic outlook at the AEA Annual Meeting in California.

Monday

9:45 a.m.: PMI Manufacturing Index

10 a.m.: ISM Manufacturing Index, construction spending

5:30 p.m.: San Francisco Fed President John Williams speaks on the implementation of macroprudential policies by central banks at the AEA Annual Meeting in California.

Tuesday

Earnings: Eli Lilly (2016 guidance only), Sonic

December light vehicle sales announced

Wednesday

Earnings: Monsanto, RPM International

7 a.m.: Mortgage applications

8:15 a.m.: ADP employment report

8:30 a.m.: International trade

9:45 a.m.: PMI services index

10 a.m.: Factory orders and ISM non-manufacturing index

10:30 a.m.: Oil inventories

2 p.m.: FOMC minutes

Thursday

Earnings: Walgreens Boots Alliance, Constellation Brands, Finish Line, KB Home, Bed Bath & Beyond, PriceSmart, Ruby Tuesday, Synnex, The Container Store, WD-40

7:30 a.m.: Challenger job-cut report

8:45 a.m.: Richmond Fed President Jeffrey Lacker speaks on the economic outlook for January 2016 at the Greater Raleigh Chamber of Commerce in Raleigh, North Carolina.

8:30 a.m.: Jobless claims

10:30 a.m.: Natural gas inventories

2:15 p.m.: Chicago Fed President Charles Evans speaks on economic conditions and monetary policy at the Wisconsin Economic Forecast Luncheon in Madison, Wisconsin.

4:30 p.m.: Fed balance sheet/money supply

Friday

Earnings: Acuity Brands

8:30 a.m.: Non-farm payroll, unemployment rate and average hourly wages

10 a.m.: Wholesale trade

1 p.m.: Rig count

3 p.m.: Consumer credit and Treasury STRIPS