Certain key trends are reversing

An employee works on an engine at the assembly line of a car factory in Qingdao, China.

STR | AFP | Getty Images

Markets Tuesday: certain key trends are reversing, but it's way too early to talk about a correction.

Worries about global deflation are moving the markets Tuesday. You had disappointing manufacturing numbers from China and the UK, then the Reserve Bank of Australia (RBA) surprised everyone by cutting interest rates.

If you doubt that deflation (or at least almost no inflation) is a concern, here is what the RBA said: "Inflation has been quite low for some time and recent data were unexpectedly low. While the quarterly data contain some temporary factors, these results...point to a lower outlook for inflation than previously forecast."

Not surprisingly, Tuesday's market decliners are energy, materials, and financials.

Also not surprisingly, the market leaders this quarter are energy, materials, and financials.

Huh? Remember the trade this quarter that everyone has played: weaker dollar + stabilization in China + bottoming in oil + accomodative Fed = "greenlight" signal to buy cyclicals (energy, materials, industrials, financials).

Hence we have our leadership of materials, energy, and financials, with health care and select industrials also doing well.

There are some cracks that have developed in this thesis: 1) these names have become overbought, with many big industrials trading at roughly 20 times forward earnings, certainly a "full" valuation, 2) the China data has been choppy and difficult to read, and 3) the dollar slide has been so notable that there is talk that it may be bottoming, and Tuesday's notable reversal (the Dollar Index is up after being down notably earlier in the day) certainly lends credence to that idea.

Is this the start of something? Well, if it is, it's pretty modest. As with all market leaders, energy, materials, and industrials are now susceptible should there be even a modest market pullback...and so far that is all we are seeing in the broader market.

Look at it this way: the S&P 500 was at 2,100 at the end of end of April; we're now only 2 percent off that. So far, this is a modest, garden variety pullback, not even a correction. So far.