What's next for stocks after trillion-dollar wipeout

Dow lost 1,000+ points this week
Dow lost 1,000+ points this week   

After a jarring and brutal week for stocks, markets are primed for further pounding in the week ahead, with China, oil and now the start of the corporate earnings season all posing potential hazards.

Dow futures opened about 90 points or 0.55 percent lower in early Asian trade on Monday, implying triple digit losses for the Dow Jones industrial average. S&P futures shed about 10 points.

On Friday, stocks closed out their worst start to the year ever. The S&P 500's sharp 6 percent decline in the past week was the steepest weekly loss since summer 2011 and wiped out more than $1 trillion in market cap. The S&P closed at 1,922, and is now nearly 10 percent below its May all-time high. The Dow, also in a more than 10 percent correction, lost more than 1,000 points for the week to 16,346, while the Nasdaq dropped 7.2 percent to 4,643.

"The U.S. (jobs) data came in pretty good, but there's still a lot of uncertainty coming out of China. Oil prices are breaking new lows as well," said Gina Martin Adams, institutional equity strategist at Wells Fargo Securities. "These are the same issues as in August coming up again. I think ultimately until oil bottoms, stocks are going to struggle. ... Until we get a bottom in oil, it's going to be very tough."

Traders work on the floor of the New York Stock Exchange, January 8, 2016.
Getty Images
Traders work on the floor of the New York Stock Exchange, January 8, 2016.

Adams said she's hopeful oil will bottom in the first part of the year, so stocks can move higher. "We hopefully find the bottom in the first quarter. That would put us around probably another 6 to 8 percent downside on the S&P. ... That would put us at around a 15 percent peak to trough correction which is more consistent with a 1990s emerging market correction." Adams said the transports and mid-caps have more downside in the short term based on technicals.

Oil tanked 10 percent in the past week on continued reports of oversupply, despite rising tensions between Iran and the world's biggest exporter, Saudi Arabia. West Texas Intermediate futures fell to $33.16 per barrel.

Oil analysts are loathe to call a bottom, after crude seemed to stabilize last summer before taking a plunge into the end of the year. "It's the second time we had a piercing low. I think it could be in the $20s next week," said John Kilduff, partner at Again Capital.

In the Asia session on Monday, U.S. crude futures fell more than 2 per cent to $32.45 a barrel.

Read MoreJobs report dampens US recession speculation

China resurfaced as a major fright factor. Regulators were forced to roll back an ill-conceived program for trading halts after Shanghai trading was immediately stopped on a more than 7 percent market plunge on two separate days. Also, eight days of China setting its currency lower and lower put fear into the market that the yuan would continue to drop, exporting deflation and forcing devaluations of other Asian currencies. China notched up the currency Friday, and its stock market calmed.

"There's been a tremendous amount of financial market volatility coming out of China," said Adams. "Until policymakers find a right solution, that is a near-term risk. Emerging markets are always a risk when the Fed takes its foot off the pedal."

U.S. stocks were boosted by that early in the day Friday and traded higher on a surprisingly strong report of 292,000 jobs added in December, but by the end of the day, selling re-emerged driving equities lower into the close. That sets up a warning for stocks next week.

Read MoreWhen jobs report beats expectations, buy this...

But historically, the odds of a rally are high after a 5 percent decline in the S&P 500 over a five-day period. There have been 26 instances of such sell-offs since the end of 2004, and the next five days were positive 65 percent of the time, according to CNBC Pro, using data from analytics firm Kensho.

"I'm not giving up the ghost on the market, but this is the reality. We're going to have winners and losers, and you have to pick the winners. It's no longer easy to put money into the market and watch it rise. It really is true when the Fed goes away, the easy times go away as well," said Adams. About half of the S&P 500 is already 20 percent or more off their most recent highs.

Daniel Deming, an investment advisor and options expert at Equity Armor, said it appears investors and traders have positioned themselves well for current risk levels in options and futures. "If we break 1,880 in (the S&P 500), that's another leg down from the lows we saw in August and that's a point where you would see an elevated concern. That's where a lot of people have positioned themselves for the worst-case scenario."

Read MoreThe $6 million bet against emerging markets

Deming said while the VIX, the CBOE Volatility index, has moved to the mid-$20s, there's some stabilization in the VIX options. "You're not seeing implied volatility in VIX options like you saw a month ago when the market got caught off guard as to the magnitude of the down moves," said Deming. He said the VIX is currently implying a move of 1.5 percent daily in either direction over the next 30 days.

Earnings are the next test for stocks, and there's been a lot of hand-wringing over the anticipated decline in both corporate profits and revenues this quarter. The S&P 500 companies are expected to see a 4.2 percent fall in fourth-quarter earnings, and a 3.2 percent drop in revenues, according to Thomson Reuters. Energy profits are expected to be down 68 percent.

Alcoa reports Monday, and by the end of the week, JPMorgan, Citigroup, CSX and Intel will have released earnings, among others. Chinese inflation and loan data are reported over the weekend, and in the U.S., retail sales will be the key report when they are announced Friday along with PPI, industrial production and consumer sentiment. There are also Fed speakers, and if market turmoil continues, they will be looked to for comments on it.

Read MoreHas the market really time warped back to 2008?

"I think ex-energy, earnings will be positive," said Adams. "You could see a surprise out of health care, consumer discretionary, technology, but services broadly have pricing power and more domestic focus and don't have exposure to commodities prices. Restaurants and hospitality, things like IT, software and services areas of the economy that are not exposed to emerging markets are probably better positioned."

But nothing will trump the behavior of markets themselves, and that could depend on whether Chinese officials can keep markets calm.

"It was a shock to the system," said Vassili Serebriakov, BNP currency strategist. "It will probably take more than just a one-day rebound to recover from that. We need to see several days of stabilization in the FX market in China and stabilization in equities, and then maybe we can start healing ourselves."

Read MoreMohamed El-Erian: THIS dwarfs worries about China

The dollar rose against emerging market currencies in the past week but lost against the yen and euro. Serebriakov said there was a case to be made for dollar strength at the start of the year, and if there's stabilization in China, traders will turn their focus back to U.S. fundamentals.

"I think we're seeing a lot of interest in selling dollar/yen because it's in part a proxy for equity market weakness. That kind of is still the gauge of where risk sentiment is and today it's pretty closely correlated to equity price action," said Serebriakov. Dollar/yen was 2.6 percent lower on the week.

The stock market sell-off was also watched closely by traders in the Treasury market, where yields moved lower in a safety trade. The 10-year was at 2.11 percent late Friday, and the two-year yield was at 0.93 percent.

Read MoreHere's why we have a bounce, but with no enthusiasm

"I think China feeds into a lot of concerns on different fronts. If you take a skeptical view, you say this is the kind of equity market backdrop where the Fed's not going to be able to hike," Serebriakov said.

Market expectations fluctuated on fed funds futures in the past week, and the market is still pricing in fewer rate rises than the four hikes the Fed has forecast for this year. Economists see two or three increases, and the markets are pricing in two.

Adams said the Fed could come up as an issue for markets if financial conditions continue to tighten. Economists this week said they expect the central bank's next rate hike in March but it could delay it if conditions are poor or China's weakness becomes more threatening to growth.

"People are panicking because the market is not behaving to start the year," said Adams. "It's in the background now, but it might pop back up. The Fed is supposed to follow the economy and sometimes that works at the financial markets' peril. We might just be at that point."

Read MoreAvenue Capital's Lasry: This isn't a time to panic, it's a time for opportunities

What to watch

Monday

Earnings: Alcoa, A. Schulman, Apollo Education

12:40 p.m.: Atlanta Fed President Dennis Lockhart

7:50 p.m.: Dallas Fed President Robert Kaplan

Tuesday

Earnings: CSX, Progress Software

5:30 a.m.: Fed Vice Chairman Stan Fischer on policy and rates

6 a.m.: NFIB survey

10 a.m.: JOLTs

1 p.m.: $24 billion three-year note auction

3:15 p.m.: Richmond Fed President Jeffrey Lacker

Wednesday

Earnings: Infosys, Supervalu

8 a.m.: Boston Fed President Eric Rosengren

12:30 p.m.: Chicago Fed President Charles Evans

1 p.m.: $21 billion 10-year note auction

2 p.m.: Federal budget, Beige book

Thursday

Earnings: JPMorgan Chase, Intel, First Republic Bank, Shaw Comm

8:15 a.m.: St. Louis Fed President James Bullard

8:30 a.m.: Initial claims, import prices

1 p.m.: $13 billion 30-year bond auction

Friday

Earnings: BlackRock, Citigroup, US Bancorp, Wells Fargo, PNC Financial Services, Fastenal

8:30 a.m.: Retail sales, PPI, Empire state survey

9 a.m.: New York Fed President William Dudley

9:15 a.m.: Industrial production

10 a.m.: Consumer sentiment, business inventories

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.