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Cracks appearing on the surface of the market's stunning bull run

  • We've seen something in the last two weeks we haven't seen in some time: a succession of selloffs.
  • The small-cap Russell 2000 and the Dow Jones transportation index have both broken through their 200-day moving averages, a major technical indicator.
  • Almost half of all NYSE stocks are below their 200-day moving average.

Are the markets in trouble?

Not yet, but there's some cracks. We've seen something in the last two weeks we haven't seen in some time: a succession of selloffs.

Last week, we saw a familiar phenomenon: a brief 1 percent dip in the market that turned around within a couple days. But on Thursday we had another bout of selling that is starting to do some technical damage. The small-cap Russell 2000 and the Dow Jones transportation index have both broken through their 200-day moving averages, a major technical indicator.

Almost half of all NYSE stocks are below their 200-day moving average.

Several events have come together to cause this:

  1. Trump leadership doubts. Who knew there was a Gary Cohn premium in the market? The markets drifted lower Thursday morning on a rumor that Cohn, the director of the National Economic Council and President Trump's top economic advisor, might resign. The White House later said he was staying. More importantly, it's getting harder to pull together a tax reform bill with the president's own party in revolt. Later in the day on Thursday, the market took another dip lower when Sen. Bob Corker (R-TN) told reporters that the president had yet to show the "stability" or "competence" necessary to be a successful leader. There is still a Trump premium in the markets. Traders are still very focused on tax cuts and believe that Congress and the White House have to first negotiate an increase in the debt ceiling and a new budget before turning to tax reform. Increasing doubts on the ability to execute the plan are bound to ruffle stocks.
  2. The stock market is not cheap, and leadership looks tired. There's no doubt that stocks are expensive: about 18 times forward (12-month) earnings expectations, above the historic norm of roughly 16. The big market leadership stocks like the FANG names (Facebook, Amazon, Netflix, and Google parent Alphabet) have had huge gains this year but are showing signs of exhaustion: Amazon, for example, is 11 percent off its recent high but is still up 28 percent for the year.
  3. Earnings may be topping. Earnings have been strong this year, but they may starting to top for this cycle. After reporting gains of 15.3 percent and 12.0 percent in the first and second quarter, respectively, the S&P 500 is now expected to post a gain of only 6.7 percent for the third quarter, with fourth quarter expectations rebounding to a gain of 12.2 percent. Part of the problem: big expected gains in earnings from the energy group are not materializing because of low oil prices. Retail stocks are disappointing as the companies struggle with shrinking margins.
  4. The Federal Reserve, which has been such a help for years, is now mostly perceived to be neutral for stocks. As we saw from the minutes of its most recent meeting released on Wednesday, the Fed is in a real quandary. It can't get too hawkish because inflation is below its target and will likely continue to be. But a benign Fed is largely priced into stocks. The risks to stocks is on the downside, in the event the Fed misplays its hand and raises rates too aggressively.

The next few days will be an important test. All this year, people have been set to buy the dips —and there haven't been many of them. That hasn't happened today. People are getting burned after buying last week's dip, so they are not getting the same reward they used to get. It's interesting that the S&P took a dip to a new low at the end of the day when it dropped below the low from last week (2,437).

Makes sense: once you get burned a few times, it's tougher psychologically to buy the dip.

Look, we've had a huge run in the market. Now is the right time to get a pullback. With buyers on strike due to seasonal low volume, issues with Presidential leadership, and sheer exhaustion of market leaders after a strong year, it makes sense for stocks to pull back some. For the moment, the risks outweigh the benefits.

What's a pullback? In today's context, 5 percent would be notable. We haven't had that in a long time — you have to go back to Brexit in June, 2016.

A 5 percent drop from the recent closing high of 2,480 would bring us to 2,356, which would bring us back to the levels last seen in May.

Seems like a long time ago, doesn't it?

WATCH: Markets fear White House exodus

  • 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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