Get ready for another blast of head-spinning volatility.
Following the most turbulent market week in years, some strategists are ready to call the all clear. But others say stocks could test the lows of the past week-especially if there are more signs of a weakening global economy; Ebola headlines get worse, or U.S. corporate earnings fail to deliver.
"This volatility is going to last through the election. It's upside and downside volatility. It's still two- way," said Julian Emanuel, equity strategist at UBS. "Is the worst of what we've been calling a growth scareover?...We think so."
Stocks closed out the past week with near 1 percent losses, despite tumultuous trading that saw the Dow (Dow Jones Global Indexes: .DJI) travel a 900-point weekly range in jarring triple-digit daily swings-both lower and higher. The Dow was down 163 points for the week, or 1 percent, at 16,380, and the S&P 500 lost about 19 points to 1,886. The S&P 500 had its first four-week losing streak since August 2011.
The VIX, the CBOE volatility index reflecting options positioning in the S&P 500, jumped to 30 for the first time in nearly three years this past week.
"Everyone wants to call the bottom. I feel like we're at the point where we are feeling more neutral, but it still feels very premature to me to call the bottom here," said Lori Calvasina, small-cap strategist a tCredit Suisse. She said, however, she is more negative on mid caps than small caps since forward price-to-earnings ratios on the small-cap Russell 2000 stocks have fallen back to the more normal 15.99 from over 19.5.
Andrew Burkly, Oppenheimer Asset Management head of institutional equity portfolio strategy, said he thinks the worst is over, and the S&P probably set a bottom at the 1,820 level Wednesday.
"We do think this dip is definitely buyable. We do think the low probably was on Wednesday," he said. "I still think we go out making new highs by the end of the year, 2,050 or so."
The typically less volatile Treasury market also lit up with a record volume day Wednesday and historic moves in price and yields. On that day the Dow moved more than 450 points intraday.
"These moves end up reverberating for a while though the system until we get really good clarity on what direction we're going," said George Goncalves, head of rates strategy at Nomura. "There's been a lot of damage done to the internals for all markets. It's time to reset and reassess. During that period, (volatility) remains elevated."
Goncalves said the CPI inflation data will be important this week. Its release follows last week's decline in U.S. PPI and signs of deflation in recent data for the eurozone.
"Before, we were running at aboutfour basis point moves a day. Now we're running at 15 or 10. We've been doubling the intraday volatility," he said. "This is big. It's not just going back to normal...We didn't want this. This is not the right way to end a bond rally."
Multiple reasons were pinned on the market drama in the past week, but one common theme was a cross-market fixation with the Fed's plan to end quantitative easing at its late October meeting. By Thursday, St. Louis Fed President James Bullard helped turn the tide when he said maybe the Fed should extend its tapering, given market conditions. That was an idea risk markets liked, but many Fed watchers thought unlikely.
At the same time, the markets pushed expectations for the Fed's first rate hike to the end of 2015 from the middle of the year.
"As far as the Fed goes, the pendulum is swinging back and forth. But I think the center is going to hold here. It's not more QE. It's not imminent tightening. We're thinking one or two hikes are likely late next year," Burkly said.
Calvasina said small caps are especially sensitive to Fed stimulus and tightening. "I think if the Fed does something (to extend QE), that's a positive. I think the unwinding of stimulus we've been seeing is a negative," she said, adding the Fed is one risk she continues to see for the small-cap space. Small companies are particularly sensitive to rising rates so the timing of the rate hikes has also been issue.
Markets mayhem
In the bond market, the 10-year and 30-year both saw big moves Wednesday. The 10-year fell below 2 percent for the first time in more than a year. "This was a long overdue purge in the bond market for people with stubborn shorts, and it was a pretty epic in terms of the overall moves and volumes, and the price action will definitely go into the record moves. Usually when you have these things it's a game changer," Goncalves said.
He now expects the 10-year yield to range from 1.9 to 2.4 percent through the year-end, while many strategists had been expecting 3-percent yields as the Fed moved away from QE and closer to its first rate hike.
Read More Abnormal bond market move signals bears capitulating
"There's aftershocks, and those aftershocks remain for quite some time and we're nowhere near through," he said.
Oil continued to pressure the stock market, as West Texas Intermediate fell 3.4 percent for the week. But in the final two sessions, it moved higher and WTI moved from a low below $80 on Thursday morning to as high as $84.45 a barrel Friday.
"For us, even though you had these extremes, and you certainly had a fear mentality in the stock market, the bond market and the energy market in the first few days of the week, what you didn't have was the dollar getting stronger or small caps selling off," Emanuel said. "The stronger dollar and small caps underperformance were the things that led this entire trade for the last few months. While we're not calling the bottom we want people tiptoeing into places that are likely to work coming out of the growth scare."
Emanuel said the divergence with small caps could be signaling a healing and he does not expect to see the Russell make a new low, even if the market does sell off. The S&P could make a marginal new bottom before the market moves higher.
"The worst is behind us. We're not out of the woods so basically what you could do is range trade in between the lows of earlier this week, and the (S&P's) 200-day moving average which right now is 1,906. To think the market is going to rip right through that 200-day moving average is a bit too wild-eyed bullish for us right now," he said.
Many strategists in the past several weeks had expected stocks to shift focus to earnings news and make gains on the positive results. But the market volatility and fear factors make that less likely. "It's going to be a good week. There's a good cross-section of earnings...They may not take over but they're playing a strong supporting role because they've been better," said Art Hogan, chief market strategist at Wunderlich Securities.
Monday
Earnings: Apple, SAP, IBM, Texas Instruments, Chipotle, VF Corp, Hasbro, Gannett (GCI), Peabody Energy, Halliburton (HAL), Celanese, Hexcel
Tuesday
Earnings: Coca-Cola, McDonald's, Travelers, Verizon (VZ), Discover Financial, Lockheed Martin, VMWare, Harley-Davidson, Intuitive Surgical, Illinois Tool Works, Kimberly-Clark (KMB), Six Flags, iRobot, Cree, Omnicom
10:00 a.m.: Existing home sales
Wednesday
Earnings: AT&T, Boeing, Northrup Grumman (NOC), EMC, General Dynamics, Norfolk Southern, Abbott Labs, GlaxoSmithKline, Xerox, US Bancorp, Cheesecake Factory, LaQuinta, Varian Medical, Federal-Mogul, Angie's List, Ryder System, WR Grace, Stanley Black and Decker, Northern Trust, Dow Chemical, ABB, Yelp
8:30 a.m.: CPI
Thursday
Earnings: Microsoft, Amazon.com, Caterpillar, Celgene, Comcast, Daimler, Eli Lilly, General Motors, MMM, Occidental Petroleum, Juniper Networks, Pandora, Altera, Southwestern Energy, Raytheon, Alaska Air, Dunkin Brands, Sonus, Imax, JetBlue, Under Armour, Southwest Air, Credit Suisse, United Continental, Union Pacific, KKR, Alexion Pharma, Dr. Pepper Snapple
8:30 a.m.: Weekly jobless claims
9:00 a.m.: FHFA Home prices
10:00 a.m.: Leading indicators
Friday
Earnings: Bristol-Myers Squibb, Colgate-Palmolive, Ford, UPS, Procter and Gamble, Nasdaq, Delphi Automotive, State Street, Ericsson, Shire
10:00 a.m.: New home sales
