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Geopolitical risk adds to stock issues

There are lots of moving parts affecting stocks Thursday.

We already had issues around negative earnings growth and comparatively high valuations for both the first and second quarter.

We also had issues with the timing of the Federal Reserve's interest rate hike, with the only certainty being the market believes some type of hike is coming later this year.

Negative earnings growth with the Fed raising rates down the road is not a good combination.

Read MoreFed Lockhart: Rate hike may come after midyear

On Wednesday, as we approached the end of the first quarter, we saw clear signs of rotation: The biggest decline were in sectors with the biggest gains for the year (semiconductors, biotech, solar), and the few gains were from those that had the biggest declines (energy, euro).

We have also seen a change in an important long-term trend: the strong dollar. The dollar strength has reversed as some have come to believe that the Fed's rate hikes may be put off longer—a trend which began last week and continues Thursday—and that has put a bid under commodities. Copper, for example, is up roughly 11 percent in the last week. Gold is up roughly 5 percent from its bottom a week ago.

Now we have some geopolitical risk coming into the equation, as Saudi Arabia and its allies bomb Yemen.

Southern People's Resistance militants loyal to Yemen's President Abd-Rabbu Mansour Hadi move tanks from the al-Anad air base in the country's southern province of Lahej March 24, 2015.
Reuters
Southern People's Resistance militants loyal to Yemen's President Abd-Rabbu Mansour Hadi move tanks from the al-Anad air base in the country's southern province of Lahej March 24, 2015.

This has driven oil—both Brent and West Texas Intermediate—up 4 percent overnight.

S&P futures were negative all through the evening.

Still, I'm not quite sure that Thursday's stock weakness can be blamed on the increased tensions in Yemen.

Read MoreIs Yemen the new catalyst for oil?

When stock traders are confused—which is often—they turn to the bond markets for some clarity. If this was all about geopolitical tensions, the dollar and the bond market would be much stronger. That's not happening. Even gold is only up modestly.

For the moment, this seems more about end of the quarter moves and concerns over valuations and earnings growth.

S&P 500 earnings for the first and second quarter have been negative for a couple weeks, and now stand at -2.96 percent for the first quarter, and -1.9 percent for the second quarter.

Which brings me back to the bond market. The current yield on the 10-year Treasury is 1.9 percent, smack in the middle of its trading range for the year.

That is exactly the yield on the S&P 500. As Convergex noted, the average multiple since 1970 is 2x—that is, the 10-year should have a yield twice that of the S&P 500. What's wrong? Is the S&P too cheap, or are bonds overvalued? Stock valuations are certainly not cheap, so it's hard to argue that the problem is bonds are too expensive, yields too low.

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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