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The market has a problem: There's nothing left to rotate into

  • The market has a problem: There's nothing left to rotate into.
  • In recent weeks, traders bought sectors that would benefit from tax cuts and sold those that would benefit very little.
  • But we may be reaching the limits of that trade.
  • The S&P 500 ETF (SPY) on Tuesday dropped below the early morning low, as well as Monday's low. That is a bad technical indicator.
Traders pass in front of an American flag displayed outside of the New York Stock Exchange in New York.
Michael Nagle | Bloomberg | Getty Images
Traders pass in front of an American flag displayed outside of the New York Stock Exchange in New York.

The market has a problem: there's nothing left to rotate into.

Stocks sold off again midday Tuesday for the second day in a row.

On the surface, the tax bill that has been such a market mover got push-back from Democrats who organized protests against what they view as tax cuts for the rich.

I have already warned that the tax bill is not a fait accompli, but for different reasons: It is not clear if corporate tax cuts will be a 2018 or 2019 event (the Senate bill pushes it out to 2019) and President Donald Trump has intimated that the corporate tax cut may only be 22 percent, not 20 percent.

That is a half a loaf for traders, who are anticipating tax cuts in 2018 and a 20 percent tax cut.

But the markets have already indicated there may not be too much juice left in the whole "tax cut" trade, even if it passes.

We have been in a frenzy in the past week as traders have bought sectors that would benefit from tax cuts (banks, telecoms, industrials) and sold those that would benefit very little (technology).

But we may be reaching the limits of that trade.

Two days in a row, markets rose mid-morning, then sold off.

On Tuesday, the S&P 500 ETF (SPY), widely used by active traders to quickly get in and out of the market, spiked down decisively around 2:15 p.m. when it dropped notably below the early morning low, as well as Monday's low.

That is a bad technical indicator.

It doesn't help that the recent market leader — banks led the charge down. As with Monday, the bank stocks weakened midday. The Bank ETF (KBE) also saw a volume spike midday when it, too, dropped below the early morning close. But this time most closed down, with many regionals down nearly 2 percent. Banks were down since midday Monday, with the KBE was down almost 3 percent from Monday's high.

They have also grabbed almost every underperforming sector, regardless of tax implications: transports, retail and small caps (Russell 2000).

But all that reversed Tuesday. The biggest losers were the last week's biggest gainers: telecom, banks, retail, Russell 2000, transports.

This tells you traders are now seeing the limits to this "land grab" of buying underperforming sectors and playing the "tax cut" game.

Who can blame them? Take Macy's. It was $18 three weeks ago. It hit $26 Tuesday before selling off, up 40 percent.

Macy's up 40 percent in three weeks? Really? What happened to Macy's in three weeks? Oh sure, Thanksgiving was OK and the earnings were a modest surprise, but up 40 percent?

Or take bank stocks. The regional banks went nuts. BB&T was up 10 percent in four days. So was U.S. Bancorp. Zions Bancorp was up even more. Really?

You can't help but start to think we are stealing a bit from next year's gains.

Here's a bigger question: The whole market this year has been based on tech momentum. Will traders take the chance to buy some of the (modestly) beaten-down tech names?

Take Facebook. It's in another one of its periodic downdrafts, down about 7 percent in the last week. Facebook has had several downdrafts this year, most recently in September and October, and volume spiked each time. But ultimately, buyers bought on the dip.

Will that happen this time? Ask the same question for Nvidia or Alibaba. There's been endless demand on weakness.

The difference this time: There's not much in the way of other "beaten-down" stocks to buy.

  • 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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