Where Is the Correction? Traders' Answers

Where's our correction? It's a puzzle: So many traders are expecting a pullback, and it's not happening — why not? I know, I know: because everyone is expecting it, it's not going to happen. Please. Dispense with the pretzel logic.

Here are several explanations floating around trading desks.

First: end of year strength. When you see the kind of strength we had going into the end of the year you typically see a strong start in the January of the following year.

Second,much less tension in Europe. European bond auctions have gone well, and despite the Irish government collapse, it would seem that the worst is behind us in Europe — even Germany seems more accepting of further aid for certain European institutions.

Third, economic data has continued to be generally above expectations, including today's new home sales.

Fourth, earnings have not disappointed: over 75% of companies are beating expectations, despite scattered disappointing guidance for 2011.

Finally — and this is likely the most important reason: the Fed QE2 continues to the end. Traders are buying the slightest dip because they still believe the Fed is behind them — and when you have Ben Bernanke specifically saying his policies are helping the stock market, who can blame them?

Here's what Mr. Bernanke recently said: "Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus."

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