THERE WERE MORE THAN ENOUGH EXCUSES for the sellers to finally get aggressive enough to drop an overbought stock market by about 5% from a new 2010 high in three short days last week.
The negatives were many: China cinching up lending rates, decent corporate earnings that had largely been priced in, the president proposing to neuter banks' trading desks, the reconfirmation of Federal Reserve Chairman Bernanke in congressional limbo, market bellwether Goldman Sachs (ticker: GS) rolling over by 8% in two days after showing gaudy profits by shrinking its bonus pool -- all coming at a time when, as hinted here in recent weeks, the wall of worry had shrunk significantly.
Again, these should be considered excuses, rather than causes for the pullback, which started at about the same time in January and from almost exactly the same Standard & Poor's 500 level as the January high in 2004, which followed a stupendous rally off a March low -- the same as our current situation.
Tactically minded investors are asking whether this is "it," a definitive market top and a resumption of a bearish trend. Back in 2004, as the economy was again expanding, the market's first drop was recouped, the indexes knocked around in a range for a while, then suffered a deeper correction before recovering. This is conjecture informed by historical rhythms, but maybe better than a blind guess.
A study by Ned Davis Research -- which entered fairly wide circulation last week -- showed that no bull market since 1967 had expired soon after at least 25% of NYSE issues hit a new 52-week high, as occurred during both the Jan. 8 and Jan. 15 weeks. This is vaguely encouraging, though there certainly are opposing currents at work.
For instance, Citigroup strategist Tobias Levkovich points out that inflows into bond mutual funds over the past six months are three standard deviations above their 10-year average, an extreme level of change that has typically had nasty implications for the asset class in question.
One could take heart that this activity shows a reassuring lack of excitement toward equities, though the importance of firm credit markets to stock performance in the past year means that these markets are linked....MORE