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More selling may be ahead, but bull market called not dead yet

After the worst risk-off day since the financial crisis, more selling is expected but strategists are so far unwilling to say the six-year bull market is on its death bed.

Stocks started Monday with one of the ugliest and most difficult opening selloffs in memory, and the dramatic move in the Dow was the biggest intraday swing ever.

The Dow was off 1,089 at its worst level, before recovering more than 800 points, but it finished the day 588 points lower at 15,871. The volatile trading was across asset classes, with some of the wildest moves in other financial markets, occurring around the stock market open.

"It was most acute in the currency market because I think so many people were misaligned in their positions. We just saw one of the sloppiest, most volatile New York opens that I can remember," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management. "Every single market, at this point, is totally interlinked by arbitrage. When there is a circuit failure in one, it just washes through the others. The currency market is no longer a gated community."

The dollar index was more than a percent lower, but the moves by other currencies against the euro and yen were far more dramatic. The S&P 500 closed down 77 at 1893, after falling more than 100 points in early trading.

"There were several wacky things. The ETFs, I think, were mispriced and some were trading out of line with the equities. You couldn't get a VIX quote for the first half-hour," said Art Cashin, director of floor operations at UBS. "This was not the finest hour for market mechanics." The NYSE also invoked a rule that allowed stocks to open without indications, which allowed the market to open sooner but with bigger moves in stock prices.

Ari Wald, market technician at Oppenheimer Asset Management, has been expecting a correction, and he says this one's not over. "We think it's going to take more than one day," he said. "It'll take more than a few days to stabilize from an eight-month breakdown."

Wald said the market could follow the pattern of 2011, with stocks recovering in an oversold bounce and then another wave of selling taking the market to a bottom in October.

"Maybe we finally have a 10 percent correction ... but the bull market is still intact," said Laszlo Birinyi of Birinyi Associates.

There are a number of economic reports Tuesday that markets will be watching. S&P/Case-Shiller home prices and FHFA home price data are released at 9 a.m., and new home sales are at 10 a.m. There is consumer confidence for August at 10 a.m. The Treasury also auctions $26 billion in 2-year notes at 1 p.m. ET.

"I'm hopeful that we may have pulled the Band-Aid off fast, where we now look oversold in some places. The other good news is we have quite a bit of U.S. economic data coming out this week, especially since we think it's going to be pretty good. That helps," said Bill Stone, chief investment strategist at PNC Wealth Management.

At its low point Monday, the S&P 500 was off 5.3 percent from Friday's close. Its decline last week was 5.8 percent, so it already reached correction territory on an intraday basis. Commodities were also slammed, with U.S. oil futures falling more than 5 percent to $38.24 per barrel.

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Before Tuesday trading, markets are also looking for some possible action from China. Shanghai stocks were down 8.5 percent Monday, and analysts say the market had expected a new stimulus announcement that never came.

Currencies are expected to again be very volatile if no announcement comes overnight from Beijing.

"We saw some of the widest ranges certainly since the global financial crisis. Not so much on the dollar but on some of the euro and yen crosses, double-digit percentage ranges," said Vassili Serebriakov, currency strategist at BNP Paribas. For instance, the New Zealand dollar moved in a 15 percent range against the yen Monday.

"The main driver is the big unwind or risk positions. Basically, the market has been funding risk in yen and euros, so those currencies are doing the best right now. When equities are weak, those are the currencies that are going to rally," he said.

Stocks were already crushed in last week's sharp selloff coming into Monday morning, but a big downdraft overnight in China and further selling in equities and commodities built up a negative head of steam in a thinly populated late summer market.

"Everyone's scared. This is probably a good thing. I think we'll trade around a while," said Jim Paulsen, chief investment strategist at Wells Capital Markets. Stocks have been reacting to fears that China's stock market selloff is really signaling a severe economic slowdown in the world's second-biggest economy.

Paulsen said the market's correction is a healthy sign, and it's possible it will temporarily reach as much as a 20 percent decline, or bear market territory. The last double-digit correction was four years ago, and the S&P 500 is up 73 percent since that time.

"It's a close call. It wouldn't shock me, if it happens," said Paulsen. "I'd been thinking 10 to 15 percent correction. We're pretty much there. Could it go down and challenge 20 percent? It's possible. I think the S&P is going to bottom in the 1,800s, pretty close to a 20 percent decline." Paulsen said a 20 percent drop would also signal a buying opportunity.

At the open Monday, the Dow instantly plunged 500 points within the first minute, and took another 300-point dive within the second minute of trading. Some blue chips temporarily fell more than 10 percent, and some were off as much as 20 percent. For instance, J.P. Morgan fell 21 percent to $50.07 but was trading back in the $62 range, a 2.5 percent decline. Pfizer and Verizon were each down 15 percent.

On the Nasdaq, the double-digit selling was also seen, with Baidu briefly down more than 30 percent and Starbucks off nearly 20 percent.

"That's why I've been so adamant against all this high-frequency trading, when I see stocks open down 5 points lower at 9:30 and they are trading right back up again," Birinyi said. High-frequency trading accounted for an average 49 percent of Friday's 10.6 billion trade volume, according to TABB Group. During the peak levels of high-frequency trading in 2009, about 61 percent of the 9.8 billion of average daily shares traded were executed by high-frequency traders.

According to Dow Jones, trading in stocks and ETFs paused more than 1,200 times Monday. Five-minute trading pauses are triggered by increases or declines of more than 5 percent, and they are usually in the single digits on a normal day, the news wire said.

As stocks sold off Monday, commodities fell as well and buyers moved into the Treasury market. The 10-year note yield was also very volatile, as low as 1.9 percent ahead of the opening but back above 2.03 percent in afternoon trading.

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So far, the S&P 500 is off 10 percent for the month of August, and at its low, the decline from May's high was more than 12 percent.

"I just look at this (selloff) as a good thing. We're doing what we need to do to make this bull market last. We had a valuation problem of 19 times earnings. There's no way we could handle higher rates with the market selling that high," he said.

Birinyi said the circumstances around the market selloff are eerily like in 1998, when the Russian financial crisis led U.S. stocks to wipe out the year's entire double-digit gain by early August. But stocks reversed course and ended the year with highs. He expects the market to rebound again this year.

"It's the end of August. Firms aren't fully staffed. It was just an unwind. There's continuing pressure, lack of a solution and the concern is that once again the Fed is back to square one," he said.

Traders have increasingly been betting the Fed will not raise rates in September, as expected by many economists. The recent market chaos is reinforcing that view, and Barclays on Monday moved its forecast for a rate hike to March from September.

Paulsen said the market may acutally benefit from the selloff in commodities. While viewed as negative, it could in fact be a positive. He said in three of the last four times that commodities collapsed, it was the middle of a recovery, not the beginning of a recession.

"I think economic growth is going to accelerate across the globe rather than die. Recessions occur after commodities prices go up, not when they go down. When they go down, it's a huge stimulative event," he said.

The NYSE Monday also invoked a seldom-seen rule that let the market open more quickly but also helped contribute to the plunge, traders say. Stocks were allowed to open without indications, meaning traders did not have to wait for an orderly pairing of bids and offers that could have delayed the stock market opening significantly. So instead, many stocks opened sharply lower—in double-digit declines—and the Dow was off 1,089 points momentarily.

"Once they invoke Rule 48, everyone is like, 'Oh my God, this is going to be a disaster, and it was,' " said one trader. "You put limits on orders and you end up missing them by a nickel then another and another.... A lot of people were trying to sell stocks on the open and they not were getting reports. There were missed reports. It was kind of not orderly, the way electronic trading should be."

"Some of the prices where they opened these stocks, were just insane. I know a lot of people are screaming. At the end of the day, you've got electronic trading, and they were just running roughshod in this marketplace. It's just amazing," said the trader, who asked not to be named.

Another trader, who oversees a Wall Street trading desk, said he did not fault the NYSE for pushing to open the market more quickly but says there wasn't real panic in the big sweep lower, indicating to him that there's more selling to come.