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Week Ahead: Traders look for clarity from China, Fed

Stocks start the week on a nervous footing, with traders looking for signals from both China and the Fed to turn the tide.

While stocks could see a reflex pop after last week's nearly six percent decline in the S&P 500, traders see the potential for the first double digit decline in the S&P in four years and a possible rocky period ahead.

S&P/Capital IQ strategist Sam Stovall said the S&P 500, in fact, could see its first negative year since 2011, if it does fall into a true correction of 10 percent or more.

"Should the S&P slip into a long overdue correction mode, it will likely take longer than year end to get back to break even," said Stovall. In 2011, the S&P was just very slightly lower, down much less than 1 percent. Before that it was last lower in 2008. As of now, it is down 4.3 percent for the year.

Markets have been spooked by a slowing China and traders are watching for signs of further stimulus from China as well as clarity from the Fed on whether a September rate hike is still possible.

"China's the big one. They've got to step in and do something. I think the Fed is an issue but it's not the biggest deal. They're damned if they do, damned if they don't," said Robert Doll, Nuveen Asset Management chief equity strategist and senior portfolio manager.

China Sunday allowed pension funds managed by local governments to invest in its stock market for the first time. Shanghai stocks were down nearly 12 percent last week. The Wall Street Journal also reported that China is planning to announce more steps to add liquidity to banks in the next several weeks, including cutting the deposits banks are required to keep in reserve.

Stocks fell Friday in a second day of heavy selling, with the Dow's 530-point drop the biggest one-day decline in four years. That index is now in a 10 percent correction for the first time since October 2011. The S&P 500 also fell sharply, blasting through key support levels to 1970, for a one-week decline of 5.8 percent. It is now 7.7 percent off its May highs.

Markets have been worried that China's will weaken further, and the ripple effects will continue to spread into other emerging markets and commodities. Emerging market currencies were lower in Asian trading early Monday, after a sharp drop in the past week. The Mexican peso last week was down 3.8 percent, the Malaysian ringgit was down 2.6, and the Russian ruble was down 6.6 percent, to name a few. Those markets have also been hit hard by the prospect of a rising dollar and higher U.S. rates, which would also be a setback for commodities and their currencies.

U.S. stock futures were lower Sunday. Since Tuesday, the S&P 500 fell about 130 points, with 64 of those points on Friday...