Breadth is extremely strong at 4900 gainers to just 650 decliners, but it is "gap and flat" action. The market hit the highs early and isn't gaining any traction. The vast majority of stocks on my screens are well off their early highs.
It isn't too surprising that the market needs to consolidate a bit after the move since Monday morning. It's also facing technical resistance at the S&P 500 tests the lows prior to Christmas, when optimism about a fiscal-cliff deal was running high. At that time, many thought the market might have a setup for a sell-the-news reaction to a deal, but it fell apart first and that paid off for active traders.
What I find particularly interesting today is that the action is very similar to the first trading day of last year. The S&P 500 was up 1.55% on Jan. 3, 2012, and is up 1.72% as I write this. But was unusual about last year was that the market never completely filled that first-day gap. It dipped a little intraday the next couple of trading days and came close to breaking down in early June, but it stayed green all year.
You need not look any further than that to explain why hedge funds had another sub-par year. Hedge funds do best when the market is volatility and benefits those who rely on timing and aren't afraid to hold cash. In a market that never goes red, you are better off staying long and not putting as much emphasis on market timing.
Will this year be a replay? Will the low point be the first trading day of the year? From a statistical standpoint, it is a safe bet to say no. The likelihood that the market will not close the first day gap up is very low. Last year, the main driving force was the liquidity created by the Fed's bond buying. The catalyst today doesn't have the same impact on market dynamics. This is emotional and not liquidity-driven, which I prefer.
In general, I believe that the Fed's quantitative-easing programs have made trading much more difficult because there is less focus on individual stock-picking. My hope is that even if the market doesn't perform as well in aggregate, it will still be a good environment for traders, who can finally return to stock-picking.