Second quarter 'land mines' that could drive the market down 10%

Danger Land Mines
tang Chhin Sothy | AFP | Getty Images

Although emerging markets outperformed Wall Street in the first quarter, U.S. stocks still performed well in early 2017, with chip makers, biotechs and financials leading the charge.

That combination is typical of the kind of market leadership one would want to see to forecast extended gains for the stock market into the second quarter.

But there are signs of weakness setting in. Already stocks have pulled back around 2 percent from their all-time highs scored earlier this year. That could be just the start.

First-quarter performance was largely driven by a few important factors: abundant confidence that the Trump/GOP economic stimulus agenda would sail through Congress; that corporate earnings would rebound 10-12 percent in 2017 even before any corporate tax reform; the economy would accelerate until it was strong enough to allow the Federal Reserve to 'normalize' (raise) interest rates at a quicker pace; and that global growth, likewise, would begin to quicken.

All of that seemed quite possible in the days immediately after the election and inauguration. However, the speed at which any of these stimulants may pass is now in open question – which puts future gains at risk.

The Trump Administration's ham-handed approach to moving its agenda through Congress shows no signs of letting up.

The failure of the President and a GOP-led Congress to "repeal and replace" the Affordable Care Act, was not just a legislative failure, it also fractured a Republican coalition needed to push through all other agenda items, from tax reform to future budget agreements.

"It may be time for traders to take some chips off the table, go long on volatility and get more aggressive about picking stocks whose prospects put them in a market beating position."

If the upcoming battle over Supreme Court nominee Neil Gorsuch goes 'nuclear,' (with Senate Republicans killing filibuster) that will likely destroy any remaining chance of Democrats and Republicans working together on future legislation, including tax reform and infrastructure spending.

And it's not just Trump's political fumbles that could foil the market's momentum. Economic indicators like recently released weak car sales data could stay the Fed's hand from normalizing interest rate policy. That signal, if sent, would tell the market the economy is slowing, not growing.

Hence, for the market to add to first quarter gains, it will have to climb that proverbial "wall of worry," which also includes Brexit, Frexit, Scottish succession 2.0, the Russia investigation and North Korea's constant nuclear threats.

It's hard to get bearish on a market that has shown such resilience in the face of these emerging concerns. But I am less bullish on the overall market than I have been in quite a number of months.

So, it may be time for traders to take some chips off the table, go long on volatility and get more aggressive about picking stocks whose prospects put them in a market beating position.

The second quarter is going to be filled with economic, political and foreign policy land mines. As with any disciplined approach to investing, average investors should keep contributing to a retirement savings plan on a monthly basis, as has been past practice and continue to buy individual stocks that have strong profit prospects irrespective of the shifting environment.

But, there could be an event that shakes the market from its recent complacency and gives traders a new opportunity to buy low and sell high - think another political miscue in D.C., an unexpected win by presidential candidate Marine Le Pen in France or a provocative act from North Korea that could drive stocks down 5-10 percent from current levels.

Traders should be nimble as the coming headlines, tweets and global election calendar could offer some unwelcome surprises in the weeks ahead.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.

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