Dow Flirts With Record, but Signs of a Pullback Loom

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The Dow Jones Industrial Average has been flirting with its all-time high for several sessions and any positive economic data this week could trigger the confetti. But some analysts say behind the hoopla are signs of a pullback.

The Dow's all-time intraday high was 14,164.53, a record set on Oct. 9, 2007. The blue-chip index has been within 50 points of that level since last week.

"The closer we get to these milestone events, the market's going to want to hit it," Mark Eibel of Russell Investments told CNBC. If not the ISM services report, a good jobs report could push the Dow to a new record. "The key question will be whether we hold it," he added.

Global markets find themselves caught between growing economic and political uncertainty and extraordinary central bank support. Automatic spending cuts have kicked in in the U.S., China has taken new steps to tamp down its property market and an electoral stalemate in Italy could mean a new election. But with the Fed supporting stocks and a new high for the Dow within reach, positive U.S. economic data tomorrow could push the markets to a new record.

Economists are looking for the February ISM non-manufacturing index to come in at 55, down slightly from the 55.2 reading in January. A reading above 50 indicates expansion and a better-than-expected reading could be what pushes markets upward.

"There is no conviction in the market from what we can see," Keith Bliss of Cuttone & Co. told CNBC on Monday. "You look at this grind higher and you have dividend payers and defensive stocks moving along with it. Generally, that's a trend you don't see."

He noted that the market leaders have been consumer staples and the utilities. "Now that is just bizarre behavior for a market that's trending higher," he said. "I think the bias for this market is downward trending." It could take a slightly negative jobs report or ongoing political paralysis in Washington to tip markets into a slide, he said.

Concerns about the health of the economy may be one reason for investors' ongoing defensiveness. The $85 billion in U.S. spending cuts officially took effect over the weekend. While stocks so far have largely ignored the concerns over the sequester, analysts say signs the cuts are starting to weaken the anemic economic recovery could eventually move markets.

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According to Austan Goolsbee, an economist at the University of Chicago Booth School of Business, the economic consequences of the sequester are not dire, but it could cut growth below 2 percent. Goolsbee told CNBC if growth falls below 2 percent, "I think we ought to expect the unemployment rate to start drifting up again because that's below the productivity rate."

The February jobs report is due out on Friday. Economists currently expect to see 160,000 jobs added to nonfarm payrolls and for the unemployment rate to hold at 7.9 percent, according to consensus estimates from Thomson Reuters. That is well above the 6.5 percent level of unemployment the Federal Reserve is targeting before it begins to withdraw its highly accommodative monetary policy.

Fed vice chair Janet Yellen on Monday said the central bank's aggressive monetary stimulus is warranted since the economy continues to operate well below its full potential.

(Read More: Earnings Aside, Fed Is Still Main Market Player)

Global Growth Fears

While the sluggish U.S. economic recovery continues and housing picks up, there are new concerns about the health of the global economy. Chinese policymakers announced new measures aimed at reining in the real estate sector, stoking fears about a broader China slowdown. That weighed on iron ore companies on Monday like Rio Tinto and BHP Billiton as China could consume less of the commodity used in steel production.

(Read More: China Property Curbs in Focus Ahead of Parliament Meet)

Political stalemate in Italy also has focused attention on the fact that the euro zone debt crisis remains unresolved. Failure to form a new government could mean Italians will have to return to the polls.

"There is a concern that the vote in Italy marks the end of the latency phase induced by the ECB's commitment to do what is necessary to preserve the monetary union," BBH's global head of currency strategy Marc Chandler wrote in a research note.

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With Italian bond yields rising, there will be renewed focus on what steps the European Central Bank can take to prevent a greater flare up in the region's debt crisis. Last year, the ECB soothed markets after it made a conditional promise to buy bonds issued by struggling euro zone countries.

And with European and U.K. economic growth fading, the ECB and Bank of England could eventually be forced to loosen monetary policy. Both central banks meet on Thursday. The Bank of Japan will also release a policy statement on Thursday.

(Read More: Trading the Central Bank Rate Decisions)

But central bank action can only do so much without action from political leaders to address the structural issues plaguing many developed economies.

"We have had a situation not only in the U.S., but also in Europe, of overburdening monetary policy," JPMorgan International Chairman Jacob Frenkel told CNBC. "Much of the burden is being put on the Fed and on the European Central Bank in Europe. It is a good strategy to give the governments time to do their job, but you can't give too much time. It's not healthy."

Nonetheless, central bank policy can continue to support equity markets this year. David Kelly, global strategist at JPMorgan Funds, told CNBC the Fed's $85 billion monthly bond buying is "fixing" markets so that investors cannot make money in cash or long-term government bonds.

"That's what's pushing money toward stocks," he said. "It's not that stocks are so cheap. It's that Treasurys and cash are so expensive."

(Read More: Buffett Still Buying Stocks, Sees 'Good Value')

Sam Stovall, S&P Capital IQ's chief equity strategist, also said stocks may struggle after hitting a new high. "The S&P 500 may have little time to rejoice following the setting of a new record high before collapsing once again, as the median advance following the recovery to break even from bear markets since World War II has only been three percent before stumbling and falling into another meaningful decline within only two months," he wrote in a note.

—By CNBC's Justin Menza