Monday's late day selloff was a stinging reminder that volatility still rules the stock market and the sellers are still in charge.
Stocks were "quietly volatile," as one trader described it, before tanking in the final minutes of the session. The Dow finished off 203, off 2.4 percent at 8175, and the S&P 500 was off 27 or 3.2 percent at 848.
Tuesday's markets will be just a variation on the same theme, but traders are now focusing on the Fed's two-day meeting, where it is widely expected to cut its target Fed funds rate by a half a point. That would make the rate 1 percent, its lowest level since 2004. The Fed is expected to announce its decision Wednesday at about 2:15pm ET.
"We're still saying the cut will be 25 basis points, but it could be 50. We think there will be open-ended language," said Robert Harrington, head of block trading at UBS. "..It's not the end-all and be-all, but incrementally it helps."
The market expects the rate cut, but many traders like Harrington say more signs that the credit markets are healing are what's really needed to get the stock market going again.
Brian Dolan, chief currency strategist at Forex.com, said traders in all markets will be watching the reaction of equities markets to the Fed move. "Whether it will matter or not is whether the equities markets respond...If there's no relief rally, it shows this deleveraging and asset liquidation is not finished yet. Then there's more pain to come in the stock market, and that's going to keep the dollar supported and the yen supported," he said.
The dollar Monday finished at $1.2542 per euro, a gain of 0.34 percent. It was down 1 percent against the yen at 93.58. Dolan said if the dollar rallies through $1.25 per euro, its next stop would be $1.22, then possibly $1.20. For the yen, he says if it does not stabilize above 90, the G-7 could intervene. (See Currencies/forex data at a glance.)
"I don't think anyone was expecting the complete implosion of equities around the world," Dolan said. "This is very much a panic and no doubt there is some overshoot in terms of the prices we're seeing."
Stocks have taken the driver's seat in global markets. "They capture the public's imagination much more than currencies or bonds," said Dolan.
"The key is when these Asian markets show some signs of stabilization. What we're feeling is very much the redemptions and forced liquidation from hedge funds and other asset managers," he said. He added that it may be that once hedge funds deal with the month end and October winds down, the markets will quiet down.
"There is some hope with the change of month we get a little bit of a respite from this, but then you're just left with a shell shocked market," he said.
Monday's U.S. stock market was surprisingly quiet part of the day, after a vicious selloff wracked Asian markets and left a mixed picture in Europe. The market sold off early, then stabilized until late in the day. Monday's report on new home sales was viewed as a positive by traders, but the number, like last week's existing home sales, does not mean housing prices will stop falling.
"Are you just seeing turnover because of distress sales? I don't think you can get too excited about it," said Harrington.
New data on home prices is expected Tuesday at 9am with the release of the S&P/Case-Shiller home price index. Other data Tuesday includes housing vacancies for the third quarter and consumer confidence, both released at 10am.
Earnings news will continue to be important in Tuesday's session. Occidental Petroleum, British Petroleum, Valero, U.S. Steel, Martha Stewart, Whirlpool, SAP and Royal Caribbean report early in the day. DreamWorks, Apollo Group, and McKesson report after the bell.