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Is it risk off, correction on, in the market right now?

Lately, we've seen a risk-off mentality in the growth names, otherwise known as momentum (momo) names due to outrageous valuations. So, does that mean a correction is coming?

History does suggest that weakness in the growth names does portend for a re-assessment of current prices.

However, someone has to be buying the stock that the investors/traders are selling, right? So, for some, you can argue it's risk ON. And this is what makes the market: While some do find risk in these names, there are others who are happy to add to or initiate positions in names that are down 15 percent to 50 percent. And that is the key: These same buyers today were not interested in adding to or initiating positions in these names at higher prices - they were, in fact, TOO risky. But after the sale, they become a bit more interesting.


Traders on the floor of the New York Stock Exchange.
Getty Images
Traders on the floor of the New York Stock Exchange.

But why should anyone be surprised? Haven't we been discussing this very fact for months now? Haven't you noticed the complete disconnect in prices for fundamentals? Fundamentals masked by the fact that the Federal Reserve would keep supplying the easy money? Well, guess what? The Fed has made it clear that the gravy train may be coming to its final stop – quantitative easing is coming to an end and the momo names are the first to panic.

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The Russell 2000 and the Nasdaq have both been under pressure for the last month as reality sets in. The Russell, in fact, has broken its 50-day moving average, its 200-day moving average and its longer-term trend line drawn from the November 2012 lows — this is a clear warning flag.

Nasdaq, on the other hand, has broken its 50-day moving average and is toying with breaching its 200-day moving average at 3990 — a break here will further validate a breather and cause investors/traders to reassess current stock prices against the macro environment.

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So what about the Dow and the S&P 500? As the growth names reprice, the broader market (value names) are holding in just fine as we see some money move into this space looking for equity exposure while offering less risk. But beware: Underperformance in these high-profile names suggests a larger correction may be coming in the broader market.

The CBOE volatility index (VIX) trading near the lows at the 12.40 level suggests that investor angst is receding — earnings weren't horrible, Ukraine hasn't blown up, U.S. macro data seem to be improving — gee, even China isn't falling out of bed after President Xi Jinping noted that the "new normal" for China may be slower growth. But a complacent VIX should also signal to investors/traders that too much complacency can lead to damage if a sudden change in policy, outlook or geopolitical issues comes out of the blue causing a swift and possibly violent reaction in the broader equity indexes. Note January and April 2014, the latest two examples where complacency was met with market adjustments when the mood suddenly changed.

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We have been stuck in a very tight trading range as traders/investors remain confused over what the future really looks like. Until we get more clarity, expect to remain here. If nothing changes then there is no reason for the market to break out or break down as it has discounted all of this known news.

Commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities. He is also a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.

Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.