Markets sensed relief Tuesday after a string of brutal sessions, but stocks could tumble again before truly bottoming out, according to one strategist.
Major U.S. averages spiked Tuesday morning in the wake of a three-day drubbing in which the Dow Jones industrial average lost nearly 1,500 points. But based on some key indicators, whipsaw trading could persist before stocks touch their lows, said Nicholas Colas, chief market strategist at Convergex.
"Our indicators show that U.S. equity markets are still in for more volatility in the days ahead," Colas wrote in a note Tuesday.
He outlined conditions that eight metrics may have to meet before stocks find "a near-term bottom."
U.S. benchmark WTI crude would need to avoid new lows for "at least a week," Colas contended. It plunged more than 5 percent Monday to settle at $38.24 a barrel.
"With a close at $38, oil is well below the $40 level we think divides market sentiment on a growing versus contracting global economy," Colas said.
The commodity rallied more than 3 percent in trading Tuesday, nearing $39.50 per barrel.
If yields on the note dipped to 50 basis points, or 0.5 percent, it would mean increased confidence that the Federal Reserve would not raise interest rates "any time soon," a bullish sign for stocks, Colas said. The yield sat at about 0.63 percent basis points Tuesday.
Yields on the 10-year Treasury note Monday were one of the few measurements flashing a "buy" sign for equities by Colas' estimates. Buying sent yields down to about 2.01 percent, lower than the 2.1 percent yield for the S&P 500.
But as some investor fears subsided Tuesday, the 10-year yield climbed to about 2.11 percent.
Colas said a 138-point spread between 2-year and 10-year Treasury notes would point to a bottom. But the difference was about 148 points on Tuesday.
A surge for the euro against the dollar sent it to nearly $1.16 on Monday. The currency move would normally bode well for U.S. stocks, Colas said.
"Ordinarily, that would be healthy for U.S. stocks as a weaker dollar translates into better offshore earnings on a USD income statement. Today, it was more a sign of fund flows out of U.S. dollar assets," he wrote.
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On Tuesday, though, the euro lost some of that ground, shedding 1.6 percent to trade near $1.14.
With the 's fall Monday, it touched correction territory. But the Tuesday breakout could discourage more buying.
"Despite being 10 percent cheaper than a week ago, many investors will probably wait a week to see if current levels hold," Colas wrote.
The VIX index measures near-term expectations for market volatility. A reading above 20 for five days would point to a bottom, Colas said.
It lost about 27 percent on Tuesday, falling below 30. But it remained above 20 for the third-straight day.
The CME Group's FedWatch tool gives market views for the probability of a fed rate hike, based on Fed funds futures prices. A smaller chance of a rate hike in September would be bullish for stocks.
FedWatch showed a 21 percent probability of a September hike Tuesday. "Stocks should bottom" if it shows chances at 10 percent or less, Colas noted.