Insights & Advice

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Is Everybody Happy?

You would think investors would be ecstatic. The S&P 500 Index is at 12-month highs. The NASDAQ is flirting with an eleven-year high and the Dow is just points away from 13,000. So what’s not to like?

Yet here are some recent comments from clients:

“I was lucky. I sold out when the stock was $518 a share and I sold a bunch more after that. Now I’m on the sidelines,” boasts a snowbird in Florida.

“Get me out. I don’t care if it goes higher. I want out now,” writes a banker from Virginia.

“The market can go to the moon for all I care. I’m not losing these gains,” says a widow from Colorado.

As the market moves higher the anecdotal evidence is that anxiety among investors seems to be escalating. Investors are exhibiting healthy doses of fear rather than the usual response one would expect—greed.

Granted, we are up six out of seven weeks in a row. And yes, the markets, especially NASDAQ, are overbought but everyone knows that. Maybe because last year’s extreme volatility is still fresh in our minds, we are all super cautious. Everyone now understands that the markets can drop down an elevator shaft at any moment with no warning. All of the above sure reads like a wall of worry and we know how markets love to climb in that scenario.

We are witnessing a slow grind higher. It is similar to the action we had experienced in late 2010. That period was followed by a strong move up in the markets. Technicians are indicating that the same thing could happen again.

Volatility has dissipated.  Positive momentum seems to be driving prices higher, which is something new and welcome among investors. We are also seeing sector rotation, for example, out of high-priced areas such as technology and into lower-priced sectors such as utilities.

Still, technicians are expecting some kind of consolidation before the markets forge higher. We can consolidate in two ways: back and forth action or a sudden decline. The problem is that just about everyone (including me) is expecting the same thing.

I can’t help remembering that the markets will normally do what is most inconvenient for the most number of investors. If that adage holds true, than we are all wrong and the market will simply continue to rise until everyone is bullish and no one expects a pull back.

The fundamentals certainly argue for continued upside. It appears the payroll tax cut extension through the end of 2012 is in the bag. That’s good news (or at least not bad news). The restructuring of Greek debt and second bail-out is expected to be completed early next week. New unemployment claims fell to a four year low. The economy continues to grow and dividend stocks remain the place to be.

All this good news is pushing market prices higher but at a slower and slower rate of gain. This week the S& P 500 gained 17 points, about 1%. Last year, it took about an hour or less for the same gain (or loss) to occur. Now, I’m not complaining about that, just making the point that as we approach 1,370 on the S&P 500 Index more and more traders are expecting a pullback.

The good news is that we should find out very soon if a correction is truly in the cards or the markets have simply hoodwinked all of us. In which case, expect a mad rush back into the markets fairly quickly. No one ever said this was easy.

Posted in A Few Dollars More, At the Market