Is this just a modest pullback or the start of a more serious correction?

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

Where are we? Is this just a modest pullback or the start of a more serious correction?

One problem is that the Fed and the elections are creating cross-currents that make direction a very tough call. In addition to mixed signals from Fed officials, September-October is typically a soft stretch for markets. However, in presidential election years stocks tend to outperform from Labor Day into the November elections. The last seven months of election years tend to be strong, with just two losing streaks (out of 16 elections) since 1952, according to the Stock Trader's Almanac.

One thing's for sure: central banks around the world are becoming more resistant to lowering rates and expanding quantitative easing (QE). There's clearly a rethink about the effectiveness of keeping rates this low for so long. So you not only have the Fed's Lockhart and Rosengren trying to argue there is a case for raising rates, you have the ECB standing pat on more QE, and don't be shocked if the Bank of Japan's Haruhiko Kuroda turns cautious on expanding QE when he speaks next Tuesday.

With so many cross-currents, it's tough to site past precedents. However, May 2013's Taper Tantrum, where the S&P 500 dropped roughly 5 percent over about a month, might be useful. During this period, we saw banks, energy, and industrials outperform, while emerging markets, gold, and interest-rate sensitive sectors like utilities, telecom, and REITs underperform.

None of that is happening today. The market is a mirror-image of Friday, with banks and industrials underperforming, and interest-rate sensitive utilities, telecom, and REITs outperforming after being sold off for a good part of the summer.

Why the reversal from Friday's big down day? The S&P went down roughly 75 points from Friday morning to Monday's pre-open trading—that is a HUGE drop on not much. A little pop would certainly not be a surprise.

Judging by today's action, the markets are convinced that either 1) a rate hike is not coming, or 2) a rate hike will not kill stocks. Interest-rate sensitive names are probably a bit oversold short-term, and a reasonable argument could be made that stocks in general are a bit frothy.

So today's trading does make some sense. Unless the Fed's Lael Brainard, a dove, clearly communicates that she is in favor of raising rates, the betting is that the odds of a Fed rate hike remain low. Fed Funds futures are only pricing in a 21 percent chance of a September rate hike, but it rises to a 57 percent chance for December.

Let's wait until we hear from Brainard later today. Volumes are light.