Volatility Will Continue Through the Election

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.

Earnings are expected from about 20 percent of the S&P 500, including tech companies, like Apple and Microsoft. Big Dow stocks Boeing, McDonald's, Coca-Cola and Caterpillar join a parade of consumer companies, automakers and industrials.

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However, there is little fresh U.S. economic data with the exception of existing home sales Tuesday and CPI inflation data Wednesday. Chinese retail sales, GDP and industrial production data will be important for markets Tuesday as traders try to assess whether its economy is weakening.

"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 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.

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The Nasdaq was off 0.9 percent at 4,258, but the standout was the Russell 2000, up 2.8 percent for its first weekly gain in seven weeks, after selling off well ahead of the broader market.

"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.

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"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.

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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 and 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.

This article originally appeared in CNBC.

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