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Stock bulls sidelined while markets shake out

Stocks took their worst pounding in four years this week, and selling is not likely to subside until there are some clear signals from both China and the Fed.

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. The 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.

"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.

Markets have been worried about weakness in China and whether it will continue to spread into other emerging markets and commodities. Emerging market currencies were sharply lower in the past week, hurt by falling commodities and growth fears. The Mexican peso 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.

Since Tuesday, the S&P 500 lost about 130 points, and it was down 5.8 percent for the week. The worst day by far was Friday, when the S&P lost 64 points. The selling accelerated Wednesday, the day the Fed released minutes of its last meeting.

The markets took those minutes as dovish and immediately began pricing out a rate hike for September, even though the Fed indicated it was still undecided at its July meeting. The sell off in stocks worsened Thursday and Friday, with the S&P 500 falling through its 200-day moving average and breaking multiple...