Traders watch for signs that sell-off is the 'big one'

Some say they don't expect the correction to turn into much. But they're still keeping an eye out for further trouble.

By MSN Money Partner Jan 24, 2014 12:55PM
Image: Stock market (© Zurbar/age fotostock)Updated 4:15 p.m. ET

By Patti Domm, CNBC

U.S. stock prices could continue to correct, but it's too soon to say whether this is the big one.


The 'big one' is relative, but several strategists have built a correction of 10 percent or more into their forecasts for this year. Still, they mostly expect the market to move higher and end the year with gains.


"Overall, we don't think this correction is going to turn into much. There's pretty good support for the S&P at 1,800. That's kind of where I would expect this to gravitate down towards. Below that, it's 1,775," said Andrew Burkly, Oppenheimer Asset Management head of institutional portfolio strategy.


A combination of factors rattled stocks Thursday, most prominently concerns that a slowdown in China will bite into global growth. A flash Purchasing Managers' Index (PMI) report from HSBC showing a contraction in Chinese manufacturing activity spooked world markets. Despite an improvement in European PMIs later in the day, world stocks remained under pressure.


Then in the U.S. session, existing home sales were weaker than expected, as was Markit's PMI, and while that data point hasn't been a big market mover, negativity prevailed and stocks sold off. Friday afternoon, the Dow Jones industrials ($INDU) closed down 318 points to 15,879, the Standard & Poor's 500 Index ($INX) fell 38 to close at 1,790 and the Nasdaq Composite Index ($COMPX) fell 91 to 4,128.


Scott Redler of T3Live.com said traders were fairly optimistic ahead of the China data, so many were long Wednesday.


"It seemed as if the China numbers were good that we were going to get a trade to new highs, and I guess the overnight news didn't cooperate. With that being said, I came in pretty long and a I think lot of traders went out long (Wednesday) because things were acting well, and then they reduced risk early in the day," said Redler, who follows the market's short-term technicals. "We sliced through the eight-day and closed near the 21-day (moving average on the S&P.) This is the second time it happened in 2014, and I would say the bears have short-term control right here."


The Dow briefly fell through its 50-day moving average but bounced back.


"Everytime, we've seen a move like this, within two days we snap back. If we don't snap back in the next couple of sessions -- back above 1,835-ish, the next support to watch for further downside would be 1,815," he said. "A break and close below there seems to be an air pocket down to the 1,765 area."


As the market sold off Thursday, there was market talk of big sellers of equities, and at the same time, there was a big move into Treasurys.


David Ader, chief Treasury strategist at CRT Capital, pointed out that bond market volume was at one of its three heaviest levels since mid-December. The last was on Jan. 10 when the weak December jobs report was released on and bond prices rose. The other was during the Dec. 19 Fed meeting, when bonds rose after the Fed announced a plan to cut back on quantitative easing.


"The three biggest volume days in the last five or six weeks have all been up days," he said. "That's important, and it tells you the market's short. With these three up days -- one was a Fed day, one an economic story, and one's an allocation, 'risk off' story," he said, noting yields could continue lower. The yield on the 10-year Thursday was at 2.78, its lowest since Nov. 29.


Adding to the sour mood was a sell off in emerging markets, with some impacted by the broader selloff, such as Mexico and Chile, and others reeling on their own stories, like Argentina and Brazil. Brazil was impacted by China but also negative comments from Pimco on its finances.


Argentina's currency plummeted Thursday amid signs its central bank was running low on foreign currency reserves. Turkey's central bank tried to prop its currency back up, and Venezuela's benchmark 2027 bond was yielding 14.61 percent, a day after the government announced a partial currency devaluation.


"The central bank had been managing its fall, but they're running low on dollars. The peso was down as much as 20 percent today, but now it's down about 12 percent," said Win Thin, senior currency strategist at Brown Brothers Harriman.


The selling could continue but Thin said it was overdone in some of the higher quality markets.


The big market washout also comes ahead of the Fed's meeting next week, where it is widely expected to vote to cut back on its bond buying program for a second time. The Fed in December voted to cut the program to $75 billion in monthly purchases from $85 billion.


"I think this has been a factor from the very beginning. The weakness we've seen in the last seven or eight months, its roots were embedded in changes in Fed tapering," said Alan Ruskin, head of G-10 currency strategy at Deutsche Bank. "The Fed is trying to tell us it's not tightening but EM currencies, or selective currencies see it as the beginning of less accommodation. We're still seeing the fallout."


Ruskin said the shakeout could continue, as interest rates in some countries aren't attractive enough for longer term investors. "If you want to really generalize, there is certainly fragility in the likes of Turkey, for example, Argentina. The other fragile five are still fragile," he said.


Burkly said he is keeping an eye on U.S. data, and is watching the Citigroup economic surprise index, which measures the beats and misses of economic data against economists' forecasts. It is seen as positive for stocks when the data beats forecasts, and the index is rising. Burkly said the index peaked about a week ago and looks to be rolling back down.


"Obviously that would be the worst-case scenario, the economic momentum starting to slow just as the Fed starts to ratchet things up. We do have these weather distortions in the data…we don't' think that's going to turn into much though," he said.


The selloff also comes in the first leg of an earnings season that has had its share of high profile disappointments, despite the fact that beats are handily outpacing misses.


General Electric (GE), IBM (IBM), Intel (INTC), Verizon (VZ) and Johnson & Johnson (JNJ) all moved lower on misses, hurting the Dow. Microsoft (MSFT) delivered a positive surprise when it reported Thursday afternoon, and its shares were higher in after-hours trading. (Microsoft owns and publishes MSN Money.)


Of the 102 companies reporting by Thursday morning, 63 percent beat earnings estimates, according to Thomson Reuters. Based on the companies already reported and estimates for others, profits should grow at about 7 percent for the S&P 500.


BMO Private Bank CIO Jack Ablin said the earnings look in line so far, but he was disappointed by GE and IBM in particular. 


"Those to me are great barometers of business. For this economy to run, I'd like to see a handoff from consumer to business," he said.


As for the selloff, he said it's unclear whether it is the beginning of something bigger though he'd said he would be a buyer of the market 10 to 15 percent cheaper, an area he says would be closer to fair value.


"China is a work in progress. . . They'll get to where they need to be. It's just not going to [happen] at a point and click speed. Investors are going to get frustrated," he said.


As for the U.S. market, "we've got a relatively favorable market. As long as the economy continues to accelerate and liquidity is still pretty strong, we should be okay. It's possible we could get a 10 percent correction, and I'm not going to call clients and say we need to bail out."


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224Comments
Jan 24, 2014 1:23PM
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Lets face it.  The market is way overdue for a correction.  The market is near all time highs, with a terrible economy.  The only reason it is high is because the fed is printing money like crazy.  This will not last forever. 
Jan 24, 2014 1:55PM
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If we go into a double dip, Obama will go down as the absolute worst president ever.

Economy

Spying

losing the peace after the wars

Losing American Credibility

Destroying the Health care market through deception

Benghazi

Fast and Furious

What else did I miss?  He has no successes and no promises kept.

Jan 24, 2014 2:19PM
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the  stock market  has  been  artificially  inflated  by  the  government.
Jan 24, 2014 3:26PM
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Jan 24, 2014 1:52PM
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Too much in this economy is false.  No significant job growth, no significant purchasing growth, large amounts of corporate assets as liquid cash, no significant corporate investment.  What is it that has made the stock market go up other than it has a better return than bonds, which are at an all time low.

 

Jan 24, 2014 2:27PM
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Got to love the guy from BMO Private Bank in the article.  If the "economy keeps accelerating..."  The econmy has not accelerated and has been terrible with only minor blips of improvement.  No real jobs created and the lowest employment participation rate in almost forever.  It's time to stop the Fed from pumping in the funny money and let the chips fall way they may.  That is the only way we will start to get out of this mess for everybody.  Get the market back to fundamentals like revenue and earnings without the accounting gimmicks and massive employee layoffs. 
Jan 24, 2014 1:59PM
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If some folks will panic from this minor pullback, what the heck are these folks going to do if a REAL pullback comes?
Jan 24, 2014 2:36PM
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I say let the thing burn. It's well past the point where America needs a reality check. Overspending, be it a citizen or the government, cannot be sustained.
Jan 24, 2014 2:21PM
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There's no need to fear fine citizens!! We have the great Obama looking out for us....
Jan 24, 2014 1:57PM
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Anyone making money via Telling Folks to buy Stocks are NOT going to say Sell. Those folks will always say BUY, Regardless of the actual FACTS.
Jan 24, 2014 2:59PM
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The stock market is a rich man's game.  If you can afford to gamble,  you can afford to lose,  and many are going to do just that.
There was never any real basis for the market to ascend to 16,000+ to begin with.

Jan 24, 2014 2:24PM
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I don't understand that this is a surprise to wall street.  These guys get paid to study and visit all these countries and business and they have no idea about this.  Maybe they should be held accoutable for something.
Jan 24, 2014 3:40PM
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when people on main street get jobs things will get better, but not until then

 

Jan 24, 2014 2:23PM
Jan 24, 2014 2:21PM
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Don't worry, those in control of the market will bid up this afternoon to minimize losses.
Jan 24, 2014 2:48PM
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OMG!  Time to bail out of my one story window.
Jan 24, 2014 2:53PM
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Better get your money while you still can.
Jan 24, 2014 2:20PM
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This could just be the start of an aggressive re-balance. One has to count their pennies before committing to a different mix. DYDD.
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"IS THIS THE BIG ONE?"

All taxpayers got "the big one" when The Retarded Black Prince of Pennsylvania Ave weaseled the biggest vote purchase that American or ANY nations taxpayers ever had misappropriated from them!

Jan 24, 2014 4:24PM
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As Fred G Sanford. always said "I'm coming to join you Elizabeth, It's the Big One." Lets see, virtually no new job growth, no manufacturing and government spending greater than the GDP. I going to join Elizabeth too!
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