So, the S&P 500 closed flat as a pancake in 2011, the year everyone became a "macro trader." Wasn't this the year, in fact, when many observers have pointed out that the market correlations were the highest they have ever been?
Will it surprise you, then, to know corn was up while soybeans were down in the commodities space? For all the hootin' and hollerin' over the precious metals, gold was still up nearly 10% on the year while silver was lower by about 10%. I can go on with these sorts of comparisons, but my point is this: It might have been a macro-trade environment, but you still had to pick the correct grain and the correct precious metal in order to have become a winner in 2011.
The last time the market was flat on the year, it was 1947. It is difficult to make a comparison here, of course, as it was a very different world back then. However, did you know there was a crash in 1946? The Dow was the dominant index at that point, so let me note that the crash in 1946 came in August, when the Dow lost near 20% that month. The index finally bottomed at 160 in early October. (Uh-oh -- maybe there is more correlation than we thought!) After that, though, it wasn't as if stocks were off to the races.
Longer-term, after that 1946 bottom, the Dow spent the next three years trading between 160 and 190. That might not seem like much to you, but it's about a 20% trading range. Still, it was not until the latter part of 1949 that the market finally left that range behind. My point here is that, if you believe a flat year will be followed by an outsized move up or down, a look at some history might change your opinion.
Statistically speaking, the market is short-term overbought. The flip side of that is stocks are not overbought on an intermediate-term basis.
What I find fascinating at this juncture is sentiment. Considering that the market has gone nowhere since early November -- confirming my oft-repeated view that the market was likely to chop about for a while -- sentiment has begun to lean toward too many bulls, and not bears.
The Investors Intelligence readings now show a reading just over 50% bulls, which is the highest since July.
The Market Vane bulls show a similar reading of 54% bulls, also the highest reading since July. Yet when we look at the Market Vane statistics on a four-week moving average, we see it is still rising. Trouble tends to arrive when it rolls over. In other words, as long as folks keep getting more bullish than they were four weeks ago, the market might not behave so well, but it will tend not to want to collapse.
Keep in mind this is a weekly reading, so its timing is not meant to catch the exact top or bottom but, rather, something in the area. In the last four weeks this reading has been at 50% or higher, so the likelihood of a rollover is now rising.
The market has been choppy for two months now, and I don't expect that to change in the next week or so. The intermediate-term indicators say there should be support if the market sells off due to the short-term overbought reading. For now not much has changed.