Although there is a positive bias to recent stock market action, it has been very dull action, and there is limited energy. There has been a rotation as the big-cap technology names and the Nasdaq 100 (QQQ) cool off after a period of very strong relative performance, and that has helped to produce some bounce in lagging areas such as financials and small-caps.

The bulls have maintained a high level of optimism due to the positive price action, but the bears are convinced that they are ignoring severe economic issues that will ultimately take down the market.

There are two major economic issues that are in question. The first is whether forward earnings estimates are too high, and the second is whether predictions that the Fed will start cutting rates later this year are accurate. Those two issues will determine where the market is heading.

Earnings season starts on Friday when a number of large banks report. Earnings estimates for the S&P 500 for the first quarter have been cut by about 6% so far this year, which is quite a bit higher than typically occurs.

According to FactSet, the first quarter is forecasted to be the trough in S&P 500 earnings. It is currently forecasted earnings will bounce back by 7.4% in the second quarter. That is the key number to be questioned as quarterly reports roll in and forward guidance is updated.

If earnings season does not produce better forward guidance, then the market will start to price in a recession. The main argument of bearish strategists is that estimates are still far too high. They said the same thing last quarter, and the market ran them over, but the same issue is on the table, and we will quickly see what happens with banks.

The second economic issue the market is grappling with is interest rates. Currently, the market is pricing in one more hike on May 3 of 0.25%, followed by a pause and some rate cuts later this year. The assumption is that inflation will start to cool, and the Fed will be able to quickly cut rates to prevent the lag impact of Fed policy from hurting growth too much.

This high degree of confidence that the Fed will start to cut rates is what is holding up the market right now. Lower rates are viewed as offsetting the danger of cuts in earnings estimates.

This big-picture economic battle is controlling the market and producing a muddled mess. The bulls are optimistic and have support from the price action, while the bears feel that the economic projections are wildly wrong.

Unfortunately, this action makes for a difficult trading environment. It will take a while to sort things out, and that prevents building up large positions. There isn't any extreme volatility either, making shorter-term trading difficult.

We have a mildly positive start Tuesday. There are a number of Fed speakers on the agenda, and then we have the CPI report on Wednesday.

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