Here's what's worrying the stock market

Traders work on the floor of the New York Stock Exchange at the end of the trading day on August 1, 2013 in New York City.
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Traders work on the floor of the New York Stock Exchange at the end of the trading day on August 1, 2013 in New York City.

Markets are dealing with two issues today.

First, the 10-year Treasury yield is at a two-year high. The 10-year yield moved up on better-than-expectedInitial Jobless Claims, which at 320,000 was the lowest since October 2007. It moved down slightly on the disappointing Industrial Production numbers, but the markets are clearly pricing in a September taper.

The market is trying to figure out what the "right" interest rate is. The market has obviously begun pricing in SOME tapering, but it's not clear how much. Does it go from $85 billion to $65 billion? Is that priced in? More or less? Does the Federal Reserve start with reduction in Treasury bonds, or does it include reductions in mortgage backed securities?

Second, it's early, but we are not seeing the anticipated Q3 growth we were promised, as Cisco, Wal-Mart, and Macy's have indicated. This is a problem: much of the rally in the second quarter was based on a modest, but measurable increase in earnings. The estimates for Q3 are now down to four percent, down from six percent in the beginning of July, according to S&P Capital IQ.

These two issues have combined to create risk reduction on moderate volume. What's risk reduction? It means everything is down! Cyclicals or defensive, U.S. or Europe, it really doesn't matter. Everything is down today, though volume is only slightly above normal.

Put retailers in the "toxic territory" box. For a couple months, anything interest-rate sensitive has been in the "toxic territory" box: utilities, telecom, and home builders.

With the disappointing commentary from Macy's, Wal-Mart, and Kohl's as well, you can put retailers in that box.

That means that the leadership, for the moment, is getting narrower, which is emboldening bears, already screaming about the dramatic reduction in New Highs and the expansion of New Lows.

What to do now? All this year, buy-the-dip has been the right strategy. Will that still work? You have to have an answer to this question: do you think the second half recovery is out the window for the economy and for earnings?

If you do, then buy-the-dip is certainly not going to work. If you believe--as many still do--that we will get earnings growth of roughly six percent on the S&P 500, and GDP growth of roughly two percent for the year, than buy-the-dip may be very much alive.

And remember this about the Fed: the reason it is tapering is things are supposed to be getting better. If it's not, or tapering kills the economy, they will stop tapering!

By CNBC's Bob Pisani

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.