After Drubbing, Can Stocks Find a Footing?
The stock market's steep two-day selloff may be the long-awaited pull back traders have been looking for, but strategists expect the market to stabilize and move higher before too long.
The market is now in its biggest decline since last fall, with the S&P 500 off a still shallow 5.87 percent from its all-time intraday or 1687, reached May 22. Stocks sold off Thursday with other risk markets, as the dollar and interest rates rose after the Federal Reserve Wednesday signaled it could begin to pare back on its bond purchases before the end of the year and end the program by the middle of next year.
"I think this is a tempest in a tea pot. It's a long overdue correction. We're back to where we were, in terms of where the market was, on May 2. Stem to stern, it was a six percent correction," said Steve Massocca of Wedbush Securities. "I just don't think it's going to get that nasty or bad. I think we could drop off a little lower and you could start putting money to work here. Is this the beginning of a new bear market?...Not with the 10-year at 2.4 percent and the Fed ready to step on the gas at a moment's notice."
While the Fed news was not unexpected, it managed to jolt markets anyway as investors adjusted to a new higher rate environment. The 10-year Treasury yield rose to 2.42 percent Thursday, breaking above a range it has been locked in since August, 2011. Stocks were lower around the world, with the S&P down 2.5 percent at 1588. Gold fell more than six percent, and emerging market currencies were slammed.
"I could see the 10-year [yield] going through 2.5. I don't see it going much higher," said Rick Rieder, co-head Americas, fixed income at BlackRock and the portfolio manager of BlackRock's Strategic Income Opportunities Fund. Rieder said he had removed a lot of credit risk from the flexible fund, buying shorter duration government bonds while the markets get through this volatile period. He also is buying some emerging market currencies and mortgage-backed securities to pick up some yield.
"There's no doubt people are re-balancing portfolios. I do see a dynamic where we'd like to add back a lot of our credit exposure in the next couple of weeks," he said.
(Read More: Why the Rise in Treasury Yields May Be OK)
As for stocks, "I think stocks will stabilize, and I actually think there's an extraordinary dynamic in place today where credit financing was…It suggests stocks should be dramatically higher. Either rates move up or equities move up. I think stocks will stabilize and at year end, they will be higher than they are today," he said.
BMO Private Bank CIO Jack Ablin said he thinks stocks will steady. "I think stocks will find their footing. Based on relative valuations, I think stocks still look pretty cheap through the lens of bonds," he said.
Selling in stocks accelerated Thursday, after the S&P broke through support at 1598 to 1600. "I think between 1535 and 1575 will be the spot to accumulate stocks again, which will be eight or nine percent from the highs, which makes sense. That's what people wanted," said Scott Redler of T3Live.com, who follows the market's short term technicals. Redler said the next target on the downside would be 1576, the 100-day moving average.
"Odds are we bounce tomorrow," said Massocca. "But day to day, it's hard to guess. It's unsettled. By mid-July, we'll be trending higher again."
(Read More: China Stocks Bare Brunt of Growth Fears)
There are no economic reports in the U.S. Friday, but there is a quadruple expiration of equity futures and options. Traders are also watching developments in China, where the central bank is refraining from its usual practice of easing cash flow problems for banks with short term funding. Now banks are lending to each other at elevated rates, and the strain comes at a time when there is also concern about China's economic growth. China's overnight repo rate spiked to 25 percent Thursday.
"I think China is adding fuel to the fire. I think to a certain degree, Syria is adding fuel to the fire," said Massocca, but he added that he thinks the market will be okay and he would start putting money to work now.
—By CNBC's Patti Domm