The financial markets have been generating a variety of mixed signals in recent weeks. First of all, we have weakness in longer-term yields as the 10Y yield has dropped from 1.75% to 1.35% and the 30Y yield has declined even more from 2.45% to 1.9%. This behavior is consistent with an expectation that the inflation and growth trajectory is going negative on a first-derivative basis.

However, this is inconsistent with strength in financial markets as the stock market has been making new highs regularly. Since June 24, the S&P 500 (SPY  ) has closed at a new high in 10 out of 12 sessions. Even lagging indexes like the Nasdaq have caught a bid and made up some of its underperformance in recent weeks. Additionally, oil prices have also been quite strong which tend to be a leading indicator of inflation. Basically, either the stock market and oil market or the bond market is incorrect in its assessment.

This Week's Action

The past week is a microcosm of this dichotomous market. Stocks trended higher for most of the week until encountering a nasty sell-off on Thursday following some disappointing economic data. However, this dip was furiously bought with the S&P 500 and Nasdaq ending the week at new highs.

Going forward, there are some reasons to be concerned about the stock market despite its impressive strength on the surface. One factor is that stocks have been much weaker under the surface. This is evident through breadth measures such as the Advance/Decline line or the New High-New Lows index which is not confirming the market's break to new highs. Another perspective is that despite the S&P 500 making new highs, only 49% of stocks in the S&P 500 are above their 50 day moving average.

From a more fundamental perspective, there are also some reasons to be more cautious. The market's advance has generated the typical excess bullish sentiment in terms of positioning and exposure. If the crowd is long and bullish, there could be an absence of marginal buyers on the sidelines to push the market higher. Therefore, it wouldn't be surprising to see a recurrence of last earnings season when many stocks sold off despite reporting strong earnings.

The Federal Reserve's recent hawkish pivot also means that positive economic news could result in selling as it could be interpreted as making the Fed more hawkish and accelerating its timeline for raising rates. The combination of a tighter Fed and falling growth expectations would certainly be negative for equity markets and result in an overdue correction.