Gina Martin Adams, institutional equities strategist at Wells Fargo Securities, said there are a series of warning signs for the stock market, but her biggest concern is the decline in the Russell.
"Given that small caps have consistently outperformed the large caps for the last five years, and historically lead the large caps, it's a little disconcerting," she said.
But she doesn't think the large caps will necessarily follow the sharp drop in the Russell from its March all-time high.
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"The bulk of evidence in my opinion does not suggest the S&P is in for a major breakdown," she said. "More likely it probably treads water here until the broader economic and earnings data gives a clearer signal. You're getting diverging results in the economic and earnings data as well."
She noted that forward guidance from companies continues to point to slower earnings growth. "I think the combination of all these conflicting signals means nobody knows what to do. We'll stay in a holding pattern until we get more clarity."
Adams said she has a "buy on the dip" mentality but the market needs to dip more for her to recommend putting more money to work.
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Analysts say it's difficult to predict how much further there is to go in the momentum selloff. "When price momentum turns, it can turn for a long time," Adams said. "The price trend of the S&P is still very strong. It's nowhere near testing the trend line. It looks like the price action of the S&P is signaling consolidation and the market trades sideways, and underneath the hood, there's a lot of action."
What to Watch
There is wholesale trade data and JOLTs, job opening and layoff data, both at 10 a.m. Friday.
Earnings are expected from ArcelorMittal, Telefonica, Alcatel-Lucent, Petrobras, Liberty Interactive, and Ralph Lauren.
The USDA releases the World Agricultural Supply and Demand Estimates report at 12 p.m.
Minneapolis Fed President Narayana Kocherlakota speaks at 8:10 a.m.