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Pro Analysis

Santoli: After a smooth 5% climb in the 1st quarter, market showing no signs of imminent failure

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After a bridge buckles or a train derails, the investigation almost always concludes that closer inspections would have detected structural weaknesses before the failure, when everything seemed to be just fine.

In that spirit, let's look carefully at a stock market that's been running smoothly, to stress-test the tape for potential vulnerabilities. Here a couple of areas where concern has been building - justified or not:

It's so calm, so must a storm be near?

Yes, it's been quiet. In the past three months, the S&P 500 moved at least 1 percent on only two days – the fewest times for any quarter in decades, and last month it finally ended a 109-day streak without a 1 percent one-day loss.

At last Monday's low, the S&P was only 3 percent from its March 1 all-time high, yet that was its deepest setback since October. During its recent eight-day losing streak, the Dow Jones Industrial Average had lost a total of just 1.9 percent, the definition of a grudging, orderly pullback.

The S&P 500 Volatility Index's average level last quarter was its lowest since the fourth quarter of 2006. That period gave way to 2007, when the tape grew more skittish but still advanced for another nine months (ahead of the singular, prolonged meltdown through 2008).

Yet while every storm follows a calm, not every phase of quiet skies leads quickly to dangerous weather. The VIX, now near 12, isn't "too low" given that the actual, realized volatility of stocks is running near 8. And one reason the market itself is so steady is the mix of offsetting strong and weak sectors – a relatively healthy pattern.

And pretty much every historical study of prior streaks without a 1 percent drop, like the one just ended, augurs above-average forward returns over months or more after they end – though each also suggests that a deeper pullback at some point should be expected. Even the best years for stocks typically see at least a 5- to 10-percent gut check or two. April is a strong month seasonally, but also the end of the best six months of the calendar.

Consider a deeper downside probe a bit of deferred maintenance this market should get around to before long, but nothing that would likely represent "the Big One."

Are investor expectations too high?