Bull Market Stampedes Over Those Calling for Correction

With stocks doing so well, it's only natural that many on Wall Street are predicting a big pullback. But so far, at least, that hasn't happened.

Rose | Mueller | Stock4B | Getty Images

The market is having its best two-month start to a year ever, the S&P 500 is already above forecasts for the end of 2012, and there hasn't been a single-day decline of one percent or more so far this year.

All that has only increased calls for a correction—or a drop of at least 10 percent in stock prices.

Bearish pundits cite rising oil, the failure of the Dow Transports Average to confirm a rally, the euro crisis, a peak in profitability and the sheer magnitude of the gains as reasons why this surge should pause.

But it seems this market just doesn’t care.

“Breadth and volume are confirming the bull market rally and cash is still sizable,” said Mary Ann Bartels, technical research analyst with Bank of America Merrill Lynch. “Everyone is waiting for the pullback to deploy cash, thus—no pullback. The max pain is for the market to rally.”

A survey by Bespoke Investment Group shows there are more bears than bulls out there, with more than half of voters of the belief that the S&P 500 will be lower one month from now. As far as fund flows, investors have pulled a net $4 billion out of equity mutual funds this year, according to the Investment Company Institute.

“The rise since the ‘buying stampede’ ended, which stopped on Jan. 26, 2012, at Dow 12,841.95, has felt unnatural to me,” wrote Jeff Saut of Raymond James in a note to clients Monday.

Unnatural or not, the numbers don’t lie.

The S&P 500 is up almost 9 percent in 2012, already exceeding the average Wall Street forecast to start the year of 1,350. There have been 37 trading days without a 1 percent-plus decline, cites Saut in his note. This has only occurred 11 times in 84 years. Ten of those years, the S&P 500 finished higher as the early momentum was a sign of lasting strength.

Despite better-than-expected economic and earnings data, most traders point to two main reasons why this market keeps stampeding higher: the Federal Reserve’s pledge to keep rates low until 2014 and Europe’s long-term refinancing operation. A second so-called LTRO occurs this Wednesday and allows European banks to borrow at low rates for a period of three years.

“There’s just a lot of money having been created that ain’t going into plant and equipment and labor, but instead making its way into equities,” said Dennis Gartman, The Gartman Letter writer who’s seen many a momentum market in his day.

Still, the bears cite the failure of the Dow Jones Transportation Average, up less than four percent this year, to hit a new high along with the Dow Industrials as reason for a coming correction. This “Dow Theory” has been a long held market maxim.

Plus, US crude oil approached $110 last week. Bears thought for sure that this global tax on the economy might be the catalyst to cause a pullback. Yet, oil prices eased on Monday and many traders say we are still far away from a number that could derail global commerce.

Technical analysts — who study charts for a living — have become worried simply by the magnitude of the move in some individual stocks this year. About 70 percent of the stocks listed on the New York Stock Exchange are above their average price of the last 200 days. The bears would argue that this means a large percentage of the market is due for a reversion to the mean.

Katie Stockton, chief market technician of MKM Partners sees it differently.

This “percentage can remain elevated for months at a time, so we would not view this as a contrarian indicator,” wrote Stockton in a note to clients. “This is a reflection of the positive breadth that has supported the market since the October 2011 low was established.”

History shows that those waiting for a correction may be waiting for a while in markets such as these.

After a 10-month consolidation period, the S&P 500 closed at a new bull market high on Friday. Bespoke Investment Group studied all bull markets where there was a least a six-month pause in between new highs.

With the benchmark now above its previous bull high reached in April 2011, it is due for a 14 percent gain a year from now, based on the average of such breakouts in the past.


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