U.S. stocks closed sharply lower Tuesday, lead by energy, as investors digested a spike in volatility and falling oil prices, while looking ahead to next week's Federal Reserve meeting.
"We're back in the world of volatility, which I don't think is a surprise since we've had fears over the Fed and falling commodity prices," said Kate Warne, investment strategist at Edward Jones.
"I tend to look at the market from three different perspectives: Technical, fundamental and psychological," said Daniel Deming, managing director at KKM Financial. "You've got a technical breakdown; ... fundamentals are pretty weak" and the market's psychology has been affected by several changes in expectations regarding economic growth and the election, among others. "Now, with the possibily that [Donald] Trump might turn this into a race again after it was all said and done, the market hasn't completely priced that in."
The Dow Jones industrial average closed more than 250 points after dropping nearly 300 points, with Goldman Sachs contributing the most losses.
"The fact of the matter is the market is in a downward cycle," said Peter Cardillo, chief market economist at First Standard Financial. "With the lack of macro news, the market is trapped in a sea of worry right now."
The S&P 500 dropped approximately 1.5 percent, with energy falling about 2.9 percent, leading all sectors lower. West Texas Intermediate futures fell 3 percent to settle at $44.90 per barrel after the International Energy Agency said the re-balancing in the oil market will take longer than expected.
Consumer discretionary, financials and health care also turned negative year to date.
"Yesterday's rebound did not improve the posture of our short-term indicators, which remain supportive of the pullback. The SPX has confirmed a breakdown below its 50-day moving average in a reflection of weak short-term momentum," said Katie Stockton, chief technical strategist at BTIG. "More climactic selling is needed to bring our market internal measures to oversold extremes, therein signaling a tradable low."
The Nasdaq slid 1.1 percent, despite strong gains in Apple.
"The tone of the market is as uncertain as it's been all year," said Art Hogan, chief market strategist at Wunderlich Securities. "Up until yesterday, we knew what every Fed official was having for breakfast, lunch and dinner."
"The problem with this week is now we've shut that down," he said.
Fed officials are now a quiet period after members of the central bank's policymaking committee made dovish remarks on U.S. monetary policy on Monday.
Lael Brainard, a Fed governor, said it would be wise to keep rates low despite continuous economic progress. Dennis Lockhart, Atlanta Fed president, said in a separate speech that a "serious discussion" on raising rates is warranted at the central bank's upcoming meeting.
U.S. equities shot higher on Monday amid Brainard and Lockhart's remarks, with the three major indexes closing more than 1 percent higher. On Friday, Boston Fed President Eric Rosengren delivered surprisingly hawkish remarks, sending U.S. stocks lower.
"The buy the dip mentality was strong [Monday]. However, we stand by our call that the recent drop in the market will not ultimately prove to be a buying opportunity just yet," said Nick Raich, CEO at The Earnings Scout. "As companies begin to report 3Q 2016 earnings, our research indicates the rate at which 4Q 2016 EPS estimates come down is likely to accelerate to the downside given the current high expectations."
Investors have been closely eyeing every piece of economic data and parsing through every speech made by fed officials, trying to find clues about what the central bank's decision on monetary policy will be.
The Fed is scheduled to meet next Tuesday through Wednesday. Market expectations for a Fed rate hike next week were 15 percent Tuesday, according to the CME Group's FedWatch tool.
The recent sharp moves in U.S. equities follow a period where the three major indexes traded in a very narrow range, but still managed to post all-time highs. In fact, the S&P had gone more than 40 straight sessions without recording a 1 percent move in either direction.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near multi-year lows during that period. On Tuesday, the VIX rose about 23 percent to 18.61. "Looks like we got through a period of exceedingly low volatility, but that seems to be over for now," said Bruce McCain, chief investment strategist at Key Private Bank.
McCain added the market's hopes for better earnings moving forward had been dampened, but "it doesn't mean we can't see better earnings."
In corporate news, short-seller Jim Chanos called the proposed merger between SolarCity and Tesla Motors "crazy" and "the height of folly" at the Delivering Alpha conference sponsored by CNBC and Institutional Investor. (Click here for the latest news from Delivering Alpha here.)
There are no major economic data due Tuesday.
"An empty economic calendar for the next forty-eight hours should also help alleviate some of the lingering skittishness. Most importantly, the FOMC has entered its quiet period with the final communication from a Committee member unambiguously suggesting that the central bank would be served better by maintaining the status quo when congregating next Wednesday," Jeremy Klein, chief market strategist at FBN Securities, said in a note to clients.
U.S. Treasurys slipped, with the two-year note yield near 0.79 percent and the 10-year note yield around 1.71 percent. Investors digested a 30-year bonds auction that saw weak demand, with direct bidders buying the fewest amount since 2009. The 30-year bonds sale followed a three-year and a 10-year notes sale that saw lackluster demand on Monday.
The U.S. dollar advanced against a basket of currencies, with the euro near $1.1213 and the yen around 102.7. The yen extended losses after Nikkei reported the bank of Japan would delve deeper into negative rates.
The slid 32.02 points, or 1.48 percent, to end at 2,127.02, with energy leading all sectors lower.
The Nasdaq dropped 56.63 points, or 1.09 percent to 5,155.25.
About nine stocks declined for every advancer at the New York Stock Exchange, with an exchange volume of 1.016 billion and a composite volume of 4.029 billion at the close
Gold futures for December delivery settled $1.90 lower at $1,323.70 per ounce.
On tap this week:
*Planner subject to change.
8:30 a.m. Import prices
8:30 a.m. Initial claims
8:30 a.m. Retail sales
8:30 a.m. PPI
8:30 a.m. Empire State survey
8:30 a.m. Philadelphia Fed
8:30 a.m. Current account
9:15 a.m. Industrial production
10:00 a.m. Business inventories
8:30 a.m. CPI
10:00 a.m. Consumer sentiment
4:00 p.m. TIC data