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Santoli: Stocks on edge as air leaks out of the Trump reflation trade

The fact that folks this morning were asking "Why is the market down so much?" tells you one of the reasons the market was down. The recent blissed-out, slow-moving sideways pattern in the area of record index highs had a lulling effect. At the lows before noon, the Dow was off 184 points, not even 1 percent. The long-term average one-day move in the Dow since 1940 of 0.645 percent. So from yesterday's close of 19,954, the "average" move in the Dow would be 128 points. Clearly, the market has been far calmer in recent months – and even years – than this average dating back to World War II. But the point is, a downward move of this magnitude and with stocks having hovered at all-time record heights shouldn't seem extraordinary or in need of detailed explanation.

Here's what I'm watching heading into the closing bell:

Reflation trade unwind

-"Really, though – why was the market down so much today?" Air has been leaking slowly out of the "reflation trade," that cluster of asset-market bets on quicker growth and higher inflation. The multi-week drift lower in Treasury yields and more recent retreat of the U.S. Dollar Index must have begun looking like more than a textbook retracement and unwinding of excessively bullish positioning. Noted this week that equity markets have been a rare refuge from heightened volatility rolling through FX, bond and commodity markets. Stocks still seem pretty stable, but today's flutter might reflect the breezes blowing from elsewhere.

Trump rally ended a while ago

-Maybe this comes as investors are reassessing the premise of a Trump-centered bullish thesis. The path seems far from clear, the plans far from detailed, the potential growth-and-wealth effects further down the road. Of course, I've been pointing out that we haven't been in pure Trump Rally mode for nearly five weeks now (tech has lately led, banks have slipped, infrastructure plays have stalled). But if we need the story to be "second thoughts on Trumponomics" just like we needed "stocks rally on Trumponomics" in the fourth quarter, then so be it. We are a species dependent on narrative shortcuts.

Trump tweet effect

-Right now, companies like Amazon and Fiat Chrysler making a show of announcing domestic hiring plans is boosting economic enthusiasm and helping CEOs stay clear of Trumpian tweet wrath. But if these become more than apple-polishing gestures and a genuine race to invest and hire domestically breaks out, it could well be good for workers and the domestic economy and not great for corporate profit margins and shareholder returns. But that's probably a long way off, not sure the market is really sniffing any of this out yet.

Tax-related selling?

-Perhaps worth noting that the Senate 'Obamacare' repeal vote sets up an elimination of related tax surcharges that helped pay for the health bill – which means a likely 3.8 percent cut in the capital-gains tax rate. It's purely educated guesswork, but this could have prompted some pent-up selling, too.

Seasonalities

-I've been pointing to the August-September-October pattern as a possible reference point to the current market phase. We'd just had a sharp, unexpected S&P rally to a new high after Brexit, then the market flattened out, trading in an unusually tight range for weeks. Everyone said, rightly, that the tape was overbought and investor sentiment overly optimistic, but the longer-term uptrend was in place and you'd want to buy any dip. Just when it seemed we might have burned off the excesses by going sideways, the indexes buckled, leading to a 3-4 percent pullback. This also would probably be a pullback worth buying, assuming earnings come in roughly as expected (which is to say, with a large majority of companies doing better than "expected").