Stocks are hitting resistance — and with good reason

Key Points
  • The S&P 500 surged 40 points in just six days, hitting historic highs on Tuesday, but we've already given up most of those gains.
  • The market is pricey — the forward earnings multiple for the S&P 500 is over 17, well above the historic norm of 15 to 16.
  • "A lot of things have to go right for the market to keep going up," UBS' Art Cashin says. "You've got to run the table here."
Art Cashin
David A. Grogan | CNBC

Stocks are hitting resistance now, and it's about time.

The S&P 500 surged 40 points in just six days, hitting historic highs on Tuesday, but we've already given up most of those gains, down 30 points since the open on Wednesday. You can blame oil's drop for part of Wednesday's decline, but the market has bigger problems.

The market is pricey — the forward earnings multiple for the S&P 500 is over 17, well above the historic norm of 15 to 16.

"A lot of things have to go right for the market to keep going up," UBS' Art Cashin said. "You've got to run the table here."

What Cashin means is that traders believe the discussion needs to shift on several key issues that are moving markets:

  1. The Fed and central banks. This "patience" mantra that Chairman Jerome Powell keeps repeating is wearing thin. Neutrality is not enough. The market is saying the global economy needs more reflation, more stimulus. Only China's central bank is in aggressive stimulus mode, but markets want others to get back in.
  2. Trade talks. Even vague rumors that progress is slowing is enough to move the markets lower.
  3. China and Europe's economies. For the last month, markets have risen because sentiment has improved. There's a belief these regions are bottoming. Now, we need to see hard economic data over several months to prove the sentiment turnaround was right.
  4. Earnings. We have avoided the dreaded earnings recession — two consecutive quarters of declining earnings — for the moment. But with stocks this high, even several quarters of "flat" earnings may not cut it. We need low, single-digit gains in the second and third quarter and high single-digit gains in the fourth. Earnings for 2020 are already above 10% expectations.