Third Time's the Harm for Market

The value (or lack thereof) of the Merrill calls notwithstanding, the Merck saga demonstrated how apt traders are to sell shares following the market's robust eight-week rally. Notably, some of the best performers since the Oct. 9 lows were among Tuesday's biggest percentage leaders. The Philadelphia Stock Exchange Semiconductor Index shed 5.2% and the Nasdaq Telecom Index lost 3.7%.

While understandable, the "sell now, ask questions later" mentality runs counter to the skeptics' lament that market participants have become wildly bullish. Certainly, sentiment indicators such as the CBOE Market Volatility Index suggest negativity has fallen sharply in the past two months, but perhaps optimism isn't as rampant as some presume. (On Tuesday, the VIX rose 5.7% to 31.76.)

The lack of runaway bullishness was further evoked by the market's apparent concern about comments Tuesday by Richard Bernstein, chief U.S. Strategist at Merrill Lynch.

Citing a longstanding target of 860 for the S&P 500, Bernstein lowered his recommended equity allocation to 45% from 50%, raised bonds to 35% from 30%, and kept cash at 20%.

"The equity market still appears highly speculative to us," Bernstein wrote. "Such speculation is typically indicative of the end of a market cycle, and not the beginning of a major bull market."

Bernstein is certainly well respected and his opinions worth heeding. But the Merrill strategist has long been the most bearish of the so-called major strategists and, thus, Tuesday's comments shouldn't have been terribly surprising to anyone who's been paying attention. The fact Bernstein's comments were partially responsible for the market's slide means either traders are looking for an excuse to sell or news outlets had no better explanation for the decline.

Of course, it's entirely possible that the market did peak early Monday and that at least the first part of December will prove cruel to those long stocks. But Tuesday's mood suggests that bearish scenario is starting to gain credence on Wall Street, and the market often has a way of doing what is least expected of it.

Notably, while stocks tumbled Tuesday, demand for Treasuries was modest. The price of the benchmark 10-year note rose 6/32 to 98 11/32, its yield falling to 4.20%.

Quick Aside

For those curious/keeping track at home, Bernstein reported Monday that his sell-side indicator dipped to 67.8% as of Nov. 29 from 69.2% at the end of October.

As reported previously, the sell-side indicator is a measure of Wall Street strategists' relative bullishness, and has been a reliable contrary indicator in recent years.

The November data suggest that Wall Street strategists remain very bullish on a historic basis but have ratcheted down their enthusiasm ever so slightly.

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