Why the drop? Can this all be due to China? No, there is a confluence of events coming together to kick off a poor start for the year:
1) A poor U.S. close to 2015. Momentum traders were sure to press the indifferent, lackluster close to what is normally a positive time of the year.
2) China. Not just the disappointing manufacturing numbers, but the coming lifting of the ban on insider selling from larger shareholders, which was imposed on shareholders who own 5 percent or more of company shares during the big drops earlier in 2015. Add to that the first day of a new systemwide circuit breaker which seems in need of resetting: halts at 5 percent (for 15 minutes) and 7 percent (for the day) is simply too small a drop to warrant a halt when you have a market that is as volatile as China's. Look for changes in these circuit breakers.
3) The Saudi/Iran conflict, a major geopolitical event.
4) The inability of oil to hold any gain. A major geopolitical event, and the oil market barely reacts? Huh? That is a sure sign no one believes supply is going to come down in a big way anytime soon.
5) ISM U.S. data missed, with December data showing a bigger contraction than expected.
Collectively, this is a message to the markets: there are not a lot of reasons to be long stocks at the moment.
We saw this right at the open. With futures down notably, there was no buying interest. Modest selling pressure dropped the market, but there were no aggressive bids.
The 2016 bull argument, for the moment, seems a bit toothless: slightly better global growth, and U.S. keeps improving.
But we are still not seeing notably improving global growth. That, ultimately, is what is driving the selling, or more accurately, the lack of buying interest.
And there is a sense of deja vu on earnings. At the start of 2015, earnings were expected to be up roughly 8 percent for the year. That all faded away, as we faced three (and now likely four) consecutive quarters of negative earnings growth.
And for 2016, guess what? Earnings are again expected to be up 8 percent this year.
And there is that same sinking feel it too will fade away.
So, look what we have:
1) There's not a lot of faith that earnings support will be there.
2) The Fed is no longer in easing mode, so stimulus support is no longer there.
3) The dollar may not be going up, but it's not dropping.
4) Oil is stuck in the mid-$30s.
Little wonder you have malaise in stocks.
Where does this leave us? For much of the second half of 2015, the S&P 500 was in a range between 2,000 and 2,100. We are now trading at the bottom of that range and could easily slip back into the 1,850-2,000 range that we saw during the big China turmoil in July and August.
There is some hope that buyers will wake up and search for bargains. They are doing it today with some retailers, as Lululemon got an upgrade from Wells Fargo and Jeffries and is pulling up a small group of retailers, including JC Penney, Kohl's , and Gap, all among the worst performers last year.