Dow Jones Reprints: This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
For the stock market, 2012 certainly has come in like a lamb. The major benchmarks haven't traded in the red from the moment the ball dropped in Times Square, the market is 20% higher than its early October low, this month's gentle 4.6% return to date is tops for any January over the past quarter-century and, as a result, no surprise, some color has returned to the cheeks of the average stock player.
Does this sheep-like behavior suggest that investors will soon be led to slaughter?
That's too drastic a conclusion to draw, based on the current evidence. But there are enough signs that some complacency has set in among the masses to suggest that it's wise to stay on alert for unwelcome surprises
First, however, give credit where it's due. Exactly the sectors that a bull would want to lead the market higher have been Johnny on the spot. Home builders, semiconductors, railroads and financials have been the rabbits on the rail pacing the indexes, sending a good message about the cyclical parts of the economy. Partly, this is bounceback from late 2011 softness, but price doesn't (always) lie.
THE MARKET'S BUOYANCY suggests that the default mode has been to grind higher in the absence of the kind of nasty headlines from Europe that lead even stalwart optimists to scoop their chips off the table. And it is a net positive that the Wall Street fraternity is uncharacteristically cautious in its targets for 2012 market rewards. This should insulate the market from anything cataclysmic, as the sentiment indicators are still recovering from extreme negative readings, a pattern that tends to be equity-friendly.
Strategists' collective upside forecasts are modest and, while generally favoring stocks, the weekly Investors Intelligence Poll of newsletter writers shows exactly as many bears as there were eight weeks and 1,000 Dow points ago, a reassuring sign of stubborn nay-saying, all else being equal.
But of course, all else is rarely equal. Small investors are at least professing confidence, with the ratio of bulls to bears responding to the (admittedly jumpy and unscientific) poll by the American Association of Individual Investors at two, a toppy level. More worrisome is the fact that real-money indicators are hinting that equity investors are leaning out over their skis a bit too far for the immediate term. Short interest has shrunk severely in both exchange-traded funds and stocks. Volume in leveraged-upside ETFs versus bearish ones has reached the kind of extreme that recently has preceded market pullbacks, even as overall volume and technical momentum have been unimpressive. Stocks have outperformed credit-market indicators, and Treasury yields have refused to relax and rise in the face of broader economic optimism. Last week featured a monthly options expiration, which for various technical reasons involving dealers' hedging patterns lent the S&P 500 a tendency to levitate to 1300-1350; it closed Friday at 1315.
THE MARKET HAS COME A LONG WAY in a little while. McMillan Analysis pointed out Friday that the Standard & Poor's 500 was three standard deviations above its 20-day average, which tends to portend at least a short, sharp reversal.
The publicity-shy investment pro known here over the past couple of years as the "mystery broker" came into the year a nervous bull, long stocks but keeping the market on a short leash as he awaited confirmation from the tape to determine if it remained a bull market. Those criteria of cyclical, risky-stock leadership, mentioned above, have checked out, yet he's tactically cautious.
For one thing, the ratio of the 15-day volume of bearish puts on the S&P 100 Index to bullish call volume hit 2-to-1 last week. Traders of these instruments, known as OEX options, are proven smart-money actors, so their caution should be heeded. In the past decade, this ratio hit this level only in February 2007, February 2011 and April 2011; it also nearly reached 2-to-1 in late October of last year.
Each instance foretold an imminent correction of some significance.
The fact that two of these episodes occurred early last year points to the similarity of that market and today's, with lots of scary macro news being defied by a quietly levitating stock market. Of course, stocks are a bit less pricey versus earnings this year, and have endured pretty trials since then. But the notion that equities have gotten slightly ahead of themselves is as valid now as it was a year ago.
The mystery broker's verdict: He doesn't "see more than 2% to 3% upside before [a] correction."
E-mail: michael.santoli@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
The online search giant's weak fourth-quarter results have sent shares tumbling. However, by all appearances, the sell-off appears overdone.
Reports from AMD, Apple and others will give major sector indications.
By Richard C. Morais Insider trading: David Moore of the Moore Brothers Wine Company lets us in on the five red wines he personally drinks to transport himself out of winter.
The bank will see earnings grow after acquiring Gotham Bank.
The sector is cheap based on metrics including price/earnings multiples.
Sterne, Agee & Leach upgraded the pawn and payday lender to Buy.
Despite the potential loss of a big customer, drug-wholesaler AmerisourceBergen offers rising profits and a growing dividend.
The banking giant swung to a fourth-quarter profit, cheering investors who are betting that the worst is over.
FBR added Noble to its Top Picks and downgraded Hercules to Underperform.
The gaming firm is seeing higher North American game sales.
These firms sit on excess cash and may feel pressured to pay, given investor appetite for yield.
Newt and Mitt duke it out in South Carolina. Is there a shortage of men in Georgia? Equities continue their dogged advance, with most indexes reaching six-month highs. And, what's up with that falling shipping indicator?
The second installment of the 2012 Barron's Roundtable features investment ideas from Mario Gabelli, Bill Gross, Meryl Witmer and Felix Zulauf. What to buy, and what to short.
Investors and pundits are greatly overstating the extent of market gyrations. Why that bodes well for U.S. stocks.
J.C. Penney shares have climbed on hope that a new CEO will quickly boost the big retailer's fortunes. But investors' bullishness looks premature.
The rebound in stocks is beginning, in its quiet way, to startle. The S&P's 500 Index's 50 worst-performing stocks of 2011 have jumped about 11% so far in 2012.
The fourth-quarter numbers won't be pretty, but the company has been rejiggered for strong performance in the future.
A possible turning point in the European crisis leads investors to turn away from the safe harbor of U.S. Treasuries.
T. Rowe Price's venerable New Horizons Fund wants to find "the right" company before buying. Why Angie's List and Panera Bread fit the bill.
A new study suggests that collecting customers' state sales taxes doesn't have much effect on Amazon's success.
Europe's ills will be a hot topic at this week's World Economic Forum. But anyone hoping for a solution to the credit crisis will be disappointed.
Roger Gatton, a Wells Fargo Advisors branch manager, wins the 2011 Barron's forecasting challenge in a tiebreaker.
What's the real inflation rate? Our deconstruction of the consumer price index finds that rather than being understated, it may well be overstated.
It's no accident that Manhattan became the center of the financial world and New York a vibrant, diverse city. Its Dutch colonizers were tremendously business-savvy. With the Hudson River, Erie Canal, and inventions like the telegraph connecting New York to the rest of the North American continent, commerce made a permanent home here.
Read Full Article »