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The S&P 500 fell 2.1 percent to 2,057, and the Dow skidded 350 points to 17,596, its second-worst day in three years.
Tuesday is the deadline for Greece to make a 1.5 billion euro payment to the IMF, but it is not expected to meet the deadline. Greece kicked off a global selloff in risk assets, when talks broke down with its creditors over the weekend.
With Greece's failed debt talks as the dominant driver, stocks also sold off Monday amid worries about the Chinese economy and a potential debt crisis brewing in Puerto Rico.
Puerto Rico Gov. Alejandro Garcia Padilla late Monday said the commonwealth needs a restructuring plan for its $72 billion in debt, and he hopes to negotiate a moratorium with bond holders to postpone debt payments for a number of years. He also expects to press Washington to extend rights to file Chapter 9 bankruptcy to Puerto Rico.
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As for Greece, stocks and risk assets sold off but traders watching sovereign bond yields noted that the European peripheral spreads were wider, but the markets are not nearly as anxious as they were several years ago. While markets view contagion as a potential risk, most traders do not expect it as a likely outcome.
"If investors are waiting for dominoes to fall, it will be eerily quiet," said Jack Ablin, CIO of BMO Capital Markets. "I know three-quarters of the debt that Greece owes is to these bailout funds. Those are public entities that can print euros."
On Tuesday, there are several economic reports. At 9 a.m., S&P/Case-Shiller home prices are reported at 9 a.m. ET, and Chicago PMI is released at 9:45 a.m. Consumer confidence is reported at 10 a.m.
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John Kosar, chief strategist at Asbury Research, said he's watching the trading around the 200-day moving averages. "If it gets close to it, that brings out people that missed the last rally and want to participate, "he said, adding the S&P is in the zone. Its 200-day was at 2,053 Monday, four points below the closing level.
"It's a place to kind of buy off of what a lot of people look at as the major trend," he said. "The advantage from an investment standpoint is you're going to find out really quick whether you just bought the low or you bought the trend change, and you've got to get out of the way. That's the value of these areas."
Kosar said he's also watching the SOX, semiconductor, index which is near its 200-day, and Cisco, which has been selling off in a negative trend. He said Cisco is tightly correlated to the Nasdaq 100 and could be indicating that index will come under more pressure. "Semis lead tech. Tech leads the market," he said.
But Kosar said the moves around the 200-day moving average may not indicate a bounce. "I think there's another shoe to drop," he said.
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Kosar said the market is setting up for the third quarter, and the moves Tuesday could be important. "You can draw a little circle around these 200-day moving averages, and it's probably a pretty safe bet we come out of those little circles looking to give you a pretty good indication of what to expect for the third quarter. The reason we're there is because of all the bad things happening," he said.
Scott Redler, a partner at T3Live.com, said the 200-day will be a major test for a market that has seen plenty of 4 to 5 percent selloffs but not a larger one for a significant time.
"We've had 4.5, 5 percent moves. This is the first time we're getting signals it could be deeper as the Dow broke its 200-day for the first time this year and the S&P is a stone's throw away from its 200-day," Redler said. "How we open will give us some clues as to whether the selling will persist and get deeper."
Redler said the S&P 500 also appears to be forming a head and shoulders formation, which could signal more selling.
"If you get below the 200-day and stay below the 200-day for multiple sessions, that means there's no institutional support, and that could mean we'll see lower prices and be on our way for a deeper correction that we haven't seen for a long time," he said.
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