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Why the market risk may be changing to the downside

For several weeks, the market risk has been to the upside. That may be changing, albeit slowly.

It's not very obvious, just staring at the market. The sideways action of last week is generally viewed as a positive way for the market to work off the slightly oversold conditions.

Today, stocks are split on extremely low volume. The Volatility Index (VIX) is flat.

But as we close out the first quarter and enter earnings season in the coming weeks, there is a bit of unease. It centers around several factors:

1) The market is not cheap. Current estimates for 2016 earnings on the S&P 500 are $120.58, according to Factset and have been dropping all quarter, which would put the S&P 500 at roughly 17 times earnings, a tad above its long-term average.

2) The earnings multiple has high risk to the downside because earnings have an unusually high degree of uncertainty. First-quarter earnings are expected to be down 8.7 percent, the largest decline since 2009, according to FactSet. This would be four straight quarter of earnings decline, and five straight quarters of revenue declines. And we are still not expecting growth until the third quarter of 2016!

3) GDP forecast has weakened. CNBC's Rapid Update now sees first-quarter GDP up a measly 0.9 percent, a significant drop from expected growth of 1.4 percent.

Given this relatively muted economic and earnings climate, it's surprising how edgy traders are about three prominent Federal Open Market Committee voters speaking this week, led by Janet Yellen, who is speaking in New York on Tuesday. Traders believe that Yellen still wants to keep the possibility of a spring rate hike alive; if that happens, the dollar will certainly rally and put further pressure on dollar-sensitive sectors like energy, materials, and industrials.

This, of course, is in direct contradiction to the earnings and economic uncertainty outlined above.

Bottom line: we are in a transition phase for the markets. After a week or so of sideways trading, the catalysts for a move higher (weak dollar, dovish Fed, better economic news) seem more muted than a few weeks ago.

  • 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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