Volatility could still be ahead for stocks, but strategists don’t foresee a major correction

Published Thu, May 20 20216:39 AM EDTUpdated Thu, May 20 20218:15 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Stocks are likely to be volatile over the next couple of weeks, as the sell-off in high flyers like Tesla and cryptocurrencies has soured investor sentiment. But strategists say the market is more likely in a pullback and not entering a larger correction. Bitcoin tumbled in volatile trading Wednesday. The cryptocurrency plunged to $30,000 overnight, a 30% decline and other crypto assets fell with it. By the end of the day, it was down 7.5%, just below $40,000, according to Coin Metrics. The stock market took its early cue from bitcoin, ripping lower before reversing its worst losses "It's very skittish. I think that's the word of the day," Fairlead Strategies founder Katie Stockton said. Wednesday "was a good reminder we're still in pullback mode. … I think it's definitely influenced retail sentiment." Paring Wednesday's losses The S & P 500 held its 50-day moving average after dropping through it. It ended the day down just 0.3%, after much steeper early losses. The Nasdaq was down less than 0.1%, virtually flat after a sharp intraday sell-off. Tesla closed at $563.46, off 2.5% but well above its lows. It is down sharply from its high of $900 on Jan. 25. The electric auto maker has been tied to bitcoin since founder Elon Musk had announced the digital currency could be used for car purchases and that the company had a substantial stake of $1.5 billion. He reversed the plan to use the cryptocurrency for vehicle purchases, but maintained Tesla would hold its bitcoin. On Wednesday, Musk tweeted with emojis that Tesla had "diamond hands ," implying the company would hold on to the cryptocurrency. Speculative stocks were hit hard, but also gave back some losses. ARK Innovation ETF was down 1.7%, while the iShares Nasdaq Biotechnology ETF fell nearly 1%. Some tech names like Facebook and Alphabet were able to shake off losses and close with gains Wednesday. Investors' inflation fears Stockton said she is watching the S & P 500 level of 3,957 as a more important potential support level than the 50-day moving average at 4,081. The 50-day is the average closing price of the last 50 sessions, and a close below it is seen as a negative indicator. The S & P closed Wednesday at 4,115. "I think the market is trying to digest a lot of different evolving story lines," said Dan Deming, managing director at KKM Financial. He said the market had been trading on the economic reopening as it hit new highs. "Now we're seeing the market trying to justify the valuations." A big worry is that inflation will pick up more and become more persistent than the Fed expects, forcing the central bank into a tightening phase. The Fed's meeting minutes, released Wednesday afternoon , added to that concern. The minutes said some Fed officials would consider discussing paring back bond buying at upcoming meetings if the economy improves. The stock market sell-off gained some momentum on the headlines before reversing losses. Watching yields Once the Fed starts tapering its bond purchases, it would slowly eliminate them before moving on to raise interest rates. As stocks steadied after dipping on the Fed minutes headlines, bonds continued to sell off. The 10-year yield, which moves opposite price, rose to 1.68% but was later at 1.67%. Julian Emanuel, head of equity and derivatives strategy at BTIG, said he's watching those yields. "We will be watching for the response in the bond market to any further equity market weakness to gauge if the market truly wants to believe, contrary to the quickly accumulating evidence, that inflation is transitory," he said. Emanuel said the S & P 500 could test the 4,000 level. He said if bond yields move higher, it is a negative for stocks since higher inflation would signal the Fed may not keep interest rates low as long as the market expects. Sam Stovall, chief investment strategist at CFRA, said the market still has a lot of positive breadth. For instance, 98% of the S & P sub indexes are above their 200-day moving average. He said the fact the S & P 500 was able to close above 4,063 — the low of May 12 — was potentially a good sign for the market and may help lift stocks Thursday. Futures prices were down fractionally. But Stovall also said it's no surprise the market has been pausing and pulling back. He said the S & P 500 has now gone for 239 days without a 5% correction. The average time span before a 5% pullback is 177 days.

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Stocks are likely to be volatile over the next couple of weeks, as the sell-off in high flyers like Tesla and cryptocurrencies has soured investor sentiment.

But strategists say the market is more likely in a pullback and not entering a larger correction.

Bitcoin tumbled in volatile trading Wednesday. The cryptocurrency plunged to $30,000 overnight, a 30% decline and other crypto assets fell with it. By the end of the day, it was down 7.5%, just below $40,000, according to Coin Metrics.

The stock market took its early cue from bitcoin, ripping lower before reversing its worst losses

"It's very skittish. I think that's the word of the day," Fairlead Strategies founder Katie Stockton said. Wednesday "was a good reminder we're still in pullback mode. … I think it's definitely influenced retail sentiment."