Stocks found their footing early Monday, but selling returned as traders fretted over emerging markets and awaited Apple's after-the-bell earnings
Caterpillar's early morning earnings beat was a boost to sentiment and lifted its shares ahead of the big report of the day: Apple.
Stocks were weaker Monday afternoon, after opening higher. But the selling was nothing like the two-day selling spree last week that was triggered mainly by worries that slowing growth in China.
Data showing contraction in Chinese manufacturing activity last week sparked fears that a slowdown would spread to the rest of the world, at a time when some emerging markets are already having problems.
The Dow was down 3.5 percent last week, to 15,879, in its worst weekly decline since November, 2011; the lost 2.6 percent, to 1,790, its worst week since June.
"Everybody treats 2012 and 2013 like they were magical years and stocks went straight up," said Daniel Greenhaus, chief global strategist at BTIG. "There was a selloff in 2012 around the election that in two days was more vicious than this one. There was a selloff around the Fed meeting in 2013 that was more vicious than this one."
(Read more: Emerging market fears hit Greece)
Both times, he said, "people were calling for the end of the rally. I think what really matters to stock prices is earnings, the forecast … the Turkish lira could become the Thai baht for sure, but I would remind people in 1997 the stock market barely hiccuped."
Traders were watching the 10 a.m. ET new home sales, which fell 7 percent, to 414,000, and soured sentiment.
"It's hour-to-hour now. We'll see what Apple says and we'll see what some of the other earnings say in the next couple of days," said one trader, adding that Apple could be very important for sentiment.
(Read more: Caterpillar earnings soar past expectations)
"It's very consumer-oriented," he said. "If they're light, the market takes a leg lower."
Apple is expected to report earnings per share of $14.07 for its fiscal first quarter, up 2 percent from last year, on revenue up 5 percent to $57.46 billion. Apple will also be watched for what it says about China, where it launched the iPhone 5s and 5c in the fall.
Caterpillar, in its forecast, said it sees improvement in the world economy, including emerging markets. The company reported fourth-quarter profits of $1.54 per share, up from $1.04 a year earlier. Revenue was down 10 percent to $14.4 billion.
The company forecast profits of $5.85 per share for 2014, excluding restructuring costs. The company also expects flat revenues of $56 billion, better than analysts expect.
Caterpillar also sees continued weakness in its mining business, as customers continue to cut investments in new equipment.
The washout in emerging markets was slowed by several developments early Monday, including reports that China Credit Trust avoided default by reaching a last-minute deal to repay investors. While the $500 million high-yield investment trust is not huge, it put the focus on potential hazards in China's shadow-banking sector and how failures could quickly kill confidence.
(Read more: Are emerging markets on brink of another crisis)
The other development that helped stem the selling was the announcement by Turkey's central bank that it would hold an extraordinary meeting Tuesday. The lira had fallen to a new low overnight but then stabilized.
Bill Stone, chief investment strategist at PNC Private Bank, said Turkey's meeting and other events will keep emerging markets front and center this week.
"Recall that the central bank failed to raise rates last week, which continued the lira's steep decline against the dollar. While none are expected to change policy, the central banks of India, Malaysia, South Africa, Mexico and Colombia have regularly scheduled meetings this week. China reports official January PMI data at the end of the week," he noted.
—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.