Singing The Same Happy Song?

Daily State of the Markets 
Wednesday Morning – December 29, 2010  

As quickly as you can, think about the last bad day the stock market had; when was it? Can you even recall a day when stocks dropped more than 1%? Frankly, this task shouldn’t be too terribly difficult as stocks usuallly experience -1% down days on a regular basis. However, you may be surprised to learn that you have to go back more than a month to find a drop of even 1% on the S&P 500 (on 11/23 the S&P dropped 1.44%). While a -1.5% day is no fun, what about the last time there was something with a little more oomph behind it? (I.E. Something downright nasty?)

In perusing the charts, it does look like there was another bad day in November (11/16 -1.67%)… one in October (10/19 -1.6%)… and a then a couple -1.5% days in late August. But, in order to find something that truly put fear into the hearts of stock investors, you have to go back more than four and one-half months to August 11th. Believe it or not, this was the most recent really bad day in the stock market (in which the S&P plunged -2.8%).

While looking back in time seems to be all the rage at this time of year, I’m guessing there may be at least a few readers wondering aloud about a point to this morning’s meandering missive. Thus, I’ll quit beating around the bush and get straight to it. In case it isn’t obvious, our little historical review has been designed to illustrate that the stock market has become a one-way street lately and that investor complacency may be at or near peak levels.

So what, you ask? Isn’t the stock market supposed to be THE place to be in 2011? Aren’t valuations in stocks better than bonds? Isn’t the Fed secretly targeting equity prices to put consumers in a good mood? Isn’t this a “risk on” environment? And didn’t Goldman Sachs say that stocks should have 20% upside next year?

While the answer to all of the above questions is indeed ‘yes’ and it does appear that everyone knows the bull case for next year by heart, I can’t help but notice that everybody seems to singing the same happy tune these days. And quite frankly, this makes me a little nervous.

I know, I know… it’s obvious that sideways is the new down and that any and all dips are simply opportunities to put cash to work in stocks. And before you start sending me hate mail or try to pull my membership in the glass-is-half-full club, I would like to point out that I too am long the market and would like nothing more than to see stock prices march steadily higher for the next six months. But as usual, there is an old Wall Street phrase that might be applicable here: “Something that everyone knows isn’t really worth knowing.”

In other words, by the time everyone everywhere starts singing the same song, making the same arguments, and focusing on the same trades, it is usually about time to become a little skeptical.

In case you think I’ve lost my mind, I’ll point to Tuesday’s stock market action as Exhibit A. With a market that is now very overbought and has seen only three modest down days this month, stocks were dealt a double-dose of weaker-than-expected economic data as well as a big spike in interest rates after a disappointing Treasury auction. On the news front, the Case-Shiller Home Price Index fell (again) and then Consumer Confidence came in well below expectations.

The response by the stock market was to, yep, you guessed it; go up (or not go down much, depending on the index in question). Thus, it appears that the bears can’t even get something going when they have a reason. This is again, something that makes me a little nervous. So, until the bears can find a raison d’être, I guess the best thing to do is just keep singing the happy song (and keep an eye on the exits).

Turning to this morning… Things are once again very quiet in pre-market trading with the markets maintaining a modestly positive tone. And other than China hiking its rediscount and relending rates (which had no impact on the markets), there isn’t much to report.

On the economic front… The calendar is blank today with no data scheduled for release.

Thought for the day: Knowing what you don’t know is vital to problem solving (and to the stock market game)…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +0.07%
  • Shanghai: +0.68%
  • Hong Kong: +1.54%
  • Japan: +0.50%
  • France: +0.95%
  • Germany: +0.35%
  • London: -0.41%

   

• Crude Oil Futures: – $0.57 to $90.92
• Gold: – $3.60 to $1402.00
• Dollar: higher against the Yen and Pound, lower vs. Euro
• 10-Year Bond Yield: Currently trading lower at 3.478%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +0.94
  • Dow Jones Industrial Average: +4
  • NASDAQ Composite: +3.3

Wall Street Research Summary

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