After suffering a serious post-Fed bashing, stocks could trade with both high volatility and high volume on the final quadruple witching Friday of the year.
The market sold off sharply into the close Thursday, with the Dow ending down 253 at 17,495 and the S&P 500 off 31 points or 1.5 percent to 2041. The twin culprits of falling oil prices and a stronger dollar reversed the previous day's rally, along with concerns that the Fed may be too optimistic about raising rates.
Bond yields fell with the 10-year at about 2.22 percent, and the 2-year at 0.98 percent. Yields move inversely to price. West Texas Intermediate oil futures settled down 1.6 percent to $34.95 per barrel, just above the low of $34.53 per barrel reached on Monday. While that move seems tiny, oil prices rose nearly 10 percent off the Monday low before falling back down again.
"We've got a quadruple witch tomorrow. People are nervous today in advance of triple witching Friday," said Leo Grohowski, chief investment officer with BNY Mellon Wealth Management. Quadruple "witching" expiration is the quarterly expiration of stock and index options and stock and index futures.
Thursday's sell-off was "a little bit of a hangover" after Wednesday's late-day rally in the wake of the Fed rate hike announcement, Grohowski said.
Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, said investors are concerned that the Fed's interest rate forecasts, also released Wednesday, were too aggressive. "People aren't expecting the Fed to go four times in 2016. Fed officials say it, but the market doesn't seem to believe it. … We had to drag people into believing the Fed was going to go and now that they have gone, each new rate hike is going to be a battle. People don't believe the economy is strong enough to withstand that many hikes," he said.
"I guess the punch is beginning to run out of the bowl. They removed two cups out of 40 gallons," he said.
Rupkey said Treasury prices were moving higher because of concerns about the stock market sell-off, and the decline in oil. Oil's weakness has been a particular problem for high-yield corporate debt, which was under pressure again Thursday.
Grohowski said investors are concerned about the Fed hiking in the current environment. "I think the bigger issue is normally when the Fed begins to tighten, they're not hiking into so much uncertainty on the economy. When it comes to equities, normally you're able to say the market is able to withstand higher rates because I have confidence in and might even be lifting my earnings estimates. This time around we don't have that. We're living with the reality of higher rates without thinking of increasing earnings estimates," he said.
But Grohowski said stocks may still be able to move higher into the very end of the year. "I think the market got what it wanted. There is an awful lot of dry powder out there. I do think we're winding down tax loss selling. It is still happening in a big way in the energy space. It's unfortunately been a better year for tax loss selling because it's been a challenging year for the market," he said. "The dry powder and the relief that the Fed gave the market what it wants, I think sets us up for a better end of year."
He does not expect strong gains, however. "I just don't see it compelling enough to warrant a major rally," he said.
Read MoreHere's what's next for stocks
Markets on Friday will also have little data to consider, with just the Markit Services PMI release at 9:45 a.m. ET. Energy traders will be watching the Baker Hughes rig count on the number of active drilling rigs in the U.S. and Canada at 1 p.m. ET
Richmond Fed President Jeffrey Lacker is speaking at 12:30 p.m. ET as part of a panel discussion at a conference on the economic outlook.