Market Insider

Stocks likely to test lows in near future

Will earnings fuel more volatility in US stocks?

Stocks are likely to test the lows of August before moving much higher, as traders look for clarity from the Fed, China and the upcoming earnings season.

Tuesday's trading is starting off rocky, with stock futures well in the red and European markets sharply lower. Commodities set the tone, with copper slumping 2.4 percent. Traders pin the drop on global growth fears, in part due to a new report from the Asian Development Bank which cut its growth forecast for China.

Meanwhile, miners were slammed with Glencore down 12 percent. Credit Suisse cut China demand assumptions and commented on the sector.

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Fed uncertainty remains a concern, and Atlanta Fed President Dennis Lockhart speaks Tuesday at 6:30 p.m. ET. Lockhart also spoke Monday and said a rate hike was still possible for this year.

Traders expected volatility to continue after Monday's bounce higher. But did the S&P 500 already hit the highs of the year when it rose to 2,134?

"I think we're going to be here grinding around, and maybe even a little lower. I don't see us rally substantially from here, but I also don't see a big down move. I think we've seen the highs for the year," said Steve Massocca, managing director at Wedbush. "I think we're going to have to come to some kind of catharsis here for what's really going on."Stocks got a lift into the opening Monday after Fed speakers made clear the decision on rates was a close call, and that the central bank could still raise rates soon, said Scott Redler, partner with

The S&P 500 rose 8 points to 1,966, but the market swung higher and lower during the day Monday. Biotechs, particularly, were slammed after Democratic front runner Hillary Clinton said she had a plan to tackle the high cost of drugs in the specialty market.

"I think we end higher for the year but over the next two to four weeks we could retest the August lows," said Redler. The August low was 1,867 on the S&P 500.

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While that view prevails, there is a more bearish tone to market talk since the Fed held back on a rate hike and turned the focus on China's slowing economy. Chinese President Xi Jinping visits the U.S. this week, and his first stop is Seattle where he gives a speech Tuesday night. Traders are looking for some reassurance on the Chinese economy and China's currency policy.

"I think that we're still churning through it. I'm going back to the Chinese yuan devaluation a few weeks ago, and I think the Fed was just another card that was played," said Massocca. "We're in a deflationary environment and I think that's going to be tough for stocks. It's certainly got to impact profitability. It's going to impact our economy going forward."

Low rates will prevent the market from falling very sharply, Massocca added.

Julian Emanuel, equities and derivatives strategist at UBS, agrees that the market is not likely to take a deep plunge.

"It's a bottoming process. Would it surprise us to test the bottom of the range? Not at all. Would it surprise us if it fell substantially through it? Yes, because you're at a 2.2 percent dividend for the S&P," he said. That's about the same as a 10-year Treasury note was yielding Monday.

"You're getting paid to wait and see if there's an earnings recovery in 2016," Emanuel said.

Read MoreFed window for a 2015 hike is closing quickly

There is no economic data Tuesday of note, and markets are awaiting comments from Fed Chair Janet Yellen, who is due to speak Thursday evening.

The U.S. Treasury auctions $26 billion in two-year notes at 1 p.m. ET. API oil inventory is released after the market close at 4:30 p.m. ET.

Redler said the S&P could stay stuck between 1940 and 1990, but the S&P 500 futures were trading closer to 1933 Tuesday morning. Dow futures were down more than 200 points before 8 a.m. ET.

"It's going to be a bit of indecision and nobody's going to do much. The positive is the biotechs did get beat up, and if the market wanted to use that a reason to sell off, it could have. You might get a few days of this before Yellen speaks on Thursday," he said.

Earnings are expected Tuesday from Autozone, CarMax, Carnival, ConAgra, Darden, FactSet and General Mills.