Stocks are facing a trifecta of potent issues: the argument that higher earnings are factored into the market ("peak earnings"), that global growth, while still strong, is slowing, and that inflation is picking up.
Exactly how much global growth is slowing — if at all — is hotly debated, but the bears have the upper hand for the moment.
Tuesday's below-consensus ISM and construction spending report, along with a hotter-than-expected prices paid report, played perfectly into the bear narrative of slower growth and higher inflation.
Bulls are now worried they are losing control of the narrative that drove stocks higher all last year. That narrative involved higher earnings, global growth and modest inflation.
These three events might help the bulls regain control:
1. The S&P 500 again holds its 200-day moving average (currently 2,613), which was a critical support level in February and early April.
2. The Federal Reserve sounds sufficiently dovish to lower expectations that it will raise rates a fourth time this year.
3. The Friday jobs report will hit right at or near expectations of 195,000 jobs created. If it is too strong, say, 250,000 or above, the bears will say it reinforces the notion that the Fed will hike rates aggressively. If it is too low, say, 95,000, the bears will seize on the slower growth story.
Same goes for wage growth, which is expected to be up 0.2 percent month over month.
This is a very tricky moment. The stakes are a lot higher now than when the market dropped in February. At that time, the markets dropped over concerns about higher inflation. The "peak earnings" and "slower growth" argument did not even exist to any great extent at that time.
Since then, not only have the fundamental arguments deteriorated, but the technical condition of the market has deteriorated as well. We have moved into what technicians call a "descending triangle," where the market bounces every time we go lower, but every bounce leads to a lower high.
The market needs to establish a better pattern, where investors stop selling rallies and go back to buying dips.