Stocks looked set for another rocky opening and a volatile trading day Tuesday.
Stock futures slid into negative territory in Monday evening trade: Dow futures were down 633 points, and S&P 500 futures were lower by 57 points.
The implied open for the Dow, based on the futures, was a decline of 1,010.75.
Futures are volatile and late night prices may look far different from stocks at the opening bell.
The S&P 500 was down 113 points, or 4.1 percent Monday in its worst day since August, 2011. The futures, which typically match the spot market’s decline, fell even more in the earlier session, off by 5.3 percent.
The cash S&P 500, which closed at 2,648, touched 2,638 in afternoon trading, and that is the level traders are watching to see if it can act as support or signal more selling.
Scott Redler, partner with T3Live.com, said the best set up for the market would be a down open, and then a reversal on large volume. “That could create a ‘turnaround Tuesday’ which would relieve some pressure,” he said.
“It’s too early to say the highs of the year is in. But it’s also too early to say a 10 percent corrective move off the highs will be enough,” said Redler, in a note.
A major source of pressure for stocks in the past week has been the bond market, where yields have been spiking with higher inflation expectations. That triggered speculation that the Fed could raise interest rates more than the three times it forecast for this year.
But Treasurys reversed sharply Monday, with morning selling giving way to buying by investors worried about the sharp drop in stock prices. In an unusual and stunning turnaround, the bench mark 10-year Treasury yield plummeted to 2.70 percent from a four-year high of 2.88 percent reached in morning trading. Yields move opposite price.
“That to me felt algorithmic and a pairing between equity futures and Treasury futures. It seemed technical in nature,” said George Goncalves, head of fixed income strategy at Nomura. Goncalves said initially there was only buying at the short end, like 2-year notes.
“The rate market went from being the culprit, to the place for a flight to quality rather quickly. For the next couple of days, the auctions are going to be important to watch. If there’s continued pressure in the equity space, money will continue to move into fixed income,” he said.
Goncalves said the government’s auctions of 3-year, 10-year and 30-year bonds will be important this week. He said the $26 billion auction of 3-year notes should do well Tuesday.
“The irony of it is [stocks] were getting nervous around higher rates, and it quickly got undone. It does show you the ultimate pin prick to any sort of bubble would be rates,” Goncalves said.
As yields came down, so did market expectations for a Fed rate hike with the market less convinced the Fed will raise interest rates three times this year.
Fed chair Jerome Powell was sworn in to head the Fed Monday, with a more than 1,100 point Dow drop on his first day of work. He is not alone in seeing a decline on his first day. The S&P 500 fell more than 2 percent when Ben Bernanke started at the Fed, and it dropped almost 1 percent for Janet Yellen.
Michael O’Rourke, chief market strategist at JonesTrading, said he expects stocks to be highly volatile Tuesday. He said the sharp selloff in ETFs that short volatility could have ripple effects in the stock market since holders have been forced to liquidate.
“They’re liquidating their positions after hours,” he said. The VIX, the Cboe’s volatility index, jumped 117 percent to 37.32. The XIV, VelocityShares Daily Inverse VIX Short-Term ETN, which shorts the VIX, was down 85 percent in late trading, and investors who shorted the VXX, the Barclays Bank iPath S&P 500 VIX Short Term Futures, were being squeezed.
