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Market Preview: The Great Consolidation

Meantime, Gary Thayer, chief macro strategist at Wells Fargo, observed Tuesday that investors are still harboring some doubts about stocks in the wake of the run-up since early June and he thinks that may lead to a period of treading water.

"Lingering concerns about how the election and the end-of-the-year fiscal cliff still appear to be restraining sentiment," Thayer said. "With sentiment only modestly positive, many market participants may not yet be fully invested. Consequently, traders may be more inclined to buy on dips rather than sell on weakness, and the stock market could consolidate recent gains."

As has been the case since the financial crisis, the current investor reticence can be traced to apprehension about the pace of economic growth and sluggish job creation, according to Thayer, who notes the Nov. 6 presidential election and fiscal cliff present big question marks.

"If investors thought that the path toward a healthier economy would be smooth, the stock market would probably be even higher than it is now, and investor sentiment would probably be more bullish," he wrote. "However, investors seem to think that the election and the pending fiscal cliff could hurt the economy and hinder its progress toward the Fed's goal of maximum employment. As a result, investor sentiment remains cautious rather than overly bullish."

While this scenario likely presents limited upside in the near-term, it also puts a floor on a potential pullback.

"[H]istory suggests that the stock market is often most vulnerable to a sizable correction when investors are overly optimistic not cautious as they are now," Thayer said. "That's because when optimism is high most investors who want to buy stocks have probably already done so. Consequently, there are fewer potential buyers left to purchase stocks and drive the stock market even higher."

Thayer's analysis jives well with the target of Wells Fargo's equities research team for the S&P 500 to finish 2012 within a range of 1400-1450.

"The stock market should have further upside potential during next year," he said. "But, after the strong summer rally and looming election and fiscal cliff, investors may want to wait for the outcomes of the election and the fiscal cliff to be resolved before aggressively buying equities again."
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