Stocks Not Flying Now

The Morgan Stanley Cyclical Index fell 0.9%, while shares of Caterpillar(CAT Quote), Deere Co.(DE Quote), FedEx(FDX Quote) and Goodyear Tire & Rubber(GT Quote) fell between 0.9% and 3%.

Diamond says the bad news data reminded investors of what some call divergences, such as the Dow Jones Transportation Average's refusing to confirm the Dow Industrials string of recent highs. Other potential red flags traders are watching include the CBOE Market Volatility Index falling below a reading of 10 recently, and the inverted Treasury yield curve, historically a harbinger of economic weakness. These red flags could point to a pullback in the near future, if not a full-blown correction, something the major averages haven't had since 2003.

Diamond also notes the housing market, which was the third quarter's largest drag, has its biggest test ahead. If the homebuilders don't sell down their inventories in the slower winter months, the typically strong springtime housing market could show yet another batch of weakness. That's not to mention the absence of construction jobs that might pressure the payrolls data in the winter months when weather prevents building in certain parts of the country.

If it wasn't enough for stocks to worry about economic growth, the FOMC's dissenter, Richmond Federal Reserve President Jeffrey Lacker, came out warning of rate hikes.

"The risk that core inflation surges again, or does not subside as desired, clearly remains the predominant macroeconomic policy risk," Lacker said in a speech at the annual economic conference of the Charlotte Chamber of Commerce in Charlotte, N.C. "The longer core inflation persists above 2%, the greater the danger of inflation becoming entrenched at too high a rate."