Finally! The stock market gets a reality check

Funny thing happened on the way through earnings season — companies are beating the estimates, earnings per share up, yet revenues have been flat to down and the guidance has not been so rosy and yet, the market has had no response The S&P 500 is stuck really in the 1800 to 1850 trading range. There has not been enough "good news" to push the market to new highs, but not enough "bad news" to cause investors to bail ... that was, until Thursday.

I have been jumping up and down about earnings — about how companies massage the numbers, how they initiate massive buybacks to give the impression that earnings per share are improving. Investors have remained cautious not wanting to miss out on the rally so they have not sold — but nor have they committed loads of new money at the highs ... and this makes perfect sense.

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Thursday saw the market finally begin to react, to reprice based on the current environment. But why? Was it earnings? Was it China? Was it the Federal Reserve? How about a little bit of everything. News of a potential default in China along with a weak report on Chinese manufacturing (the Markit/HSBC purchasing managers' index) causes investors around the world to re-assess risk.

Then, the Fed floated the idea of increased taper at next week's Federal Open Market Committee meeting to test the anxiety of investors and see how the market would react. As investors digested the news, it only accentuates the weakness in earnings — the weakness that many investors previously paid no attention to because as long as the Fed supports, then investors seem to be at ease. But once investors get the sense that the Fed is pulling out — because the economy is so much better — they all of a sudden need to reassess. The market's reaction Thursday only highlights the fact that investors do not really believe the story.

You see, month-to-date, we are told that of the 100 S&P companies that have reported so far — 73 percent have beaten estimates while 66 percent have exceeded sales guidance while less than 50 percent report better revenues. But with rates held at artificially low levels, where is the investor to go?

(Cast your vote: Poll: Is this the correction?)

At some point, companies are going to have to start really producing revenue growth that translates into real earnings growth. Until that happens, then I suspect the market will continue to struggle and the correction that so many analysts/strategists are looking for will materialize.

So investors should not be surprised to see the market test support levels in the coming days. Technically we have broken near-term support at 1825 so look for the 50-day moving average at 1810 to be the next level to test.

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Next week brings more earnings and the Fed statement. Depending on what the Fed says will dictate how investors react. If they do not believe the data, then expect further pressure. If the Fed all of a sudden suggests that tapering will remain status quo, then expect a bit of a relief rally. Either way — investors will need to remain vigilant as they build and create portfolios for 2014.

—By Kenny Polcari, director of NYSE floor operations, O'Neil Securities and CNBC contributor, often appearing on "Power Lunch." The author is not compensated by CNBC for this or any other written materials found on Follow Kenny on Twitter @kennypolcari and visit him at

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.