Market Steps Off Staircase, Asserts Systemic Change

Also, it seems like our friends at the Fed are a little concerned about valuations.
Author:
Publish date:

Say what you will about

Abby Joseph Cohen

, she got that staircase thing right.

The

Goldman Sachs

strategist was one of the first to recognize the pattern that would characterize the market for most of this decade -- the series of steps and risers that would carry the market forward. Rally, digest, rally, digest. This has been the hallmark of the bull run.

But one of the things that's interesting about the market recently is that it doesn't look like it's holding that pattern anymore. When stocks hit their highs last July, that was the time for some of that ruminative leveling off. Indeed, when the market first began to decline, Cohen and plenty of other people thought that we had just come to another step in the staircase after an especially explosive riser. But this was not the case.

Instead stocks fell, and by September they'd retraced all their gains for the year. That last step was a doozy.

'It's not supposed to be as easy as it's been to make money since October,' said Courtney Smith of Orbitex

"As far as the straight up, little correction, straight up, little correction pattern we've had since 1994," said Richard Dickson, technical analyst at

Scott & Stringfellow

in Richmond, Va., "that pattern seems to have broken."

And so here we are, sitting on a market that rallied hard from October to the end of the year. We're sitting on top of a market that has begun to show signs of fatigue, signs of getting a bit ahead of itself. And you've got to wonder if the staircase pattern is going to reassert itself.

That the market is at least in for a bit of a rough patch seems clear to Dickson. "I don't see anything technical that says this thing has more to go on the upside," he said. "Probably more than anything else, what bothers me about this market is how narrow it's been. Since the bottom in October, it's just been the tech stocks. This thing just shows no signs of broadening out."

Even bulls are a bit jumpy about where the market's gotten itself. Courtney Smith, chief investment officer at

Orbitex Management

, has faith that stocks will head higher in the long run, and Orbitex's funds are fully invested. But he feels things have gotten a bit stretched.

"We're nervous about the market," he said. "Breadth's been narrow recently, and there's too much bullish enthusiasm." Plus, he said, "It's not supposed to be as easy as it's been to make money since October."

Valuations Still on the Fed's Mind

Still, Smith isn't worried about valuations. Though the price-to-earnings ratio on the

S&P 500

is at 27, "if you exclude the top 20 mega-caps, the average stock is not overvalued."

But unlike Smith, it seems like our friends at the

Federal Reserve

are a little concerned about valuations. Last week, Vice Chairman

Alice Rivlin

and

Atlanta Fed

president

Jack Guynn

, two moderates, voiced concerns about how far stocks have gone. When the Fed went through its series of rate cuts this fall, it knew that this would risk seeing the stock market overheat -- a small price to pay when facing the collapse of global credit markets.

Before Brazil set off a new wave of global nerves, Fed watchers might have given you even money on whether

Alan Greenspan

would try to jawbone down the stock market a bit when he talks to the

House

Ways and Means Committee. But now that emerging markets are looking a little fragile again, odds are he'll hold off, which isn't to say he won't.

Meanwhile, people are busy figuring out how much Brazil's floating its currency, and the trouble that will bring to its economy will hurt the U.S. Not much.

"With this domestic economy growing the way it is, it is very hard to argue that Brazil alone is going to slow us down," said Suzanne Rizzo, economist at

MFR

. "We figure that our exports to Brazil are 0.1% to 0.2% of

GDP

. Consumer spending is 68%. If you're in an environment where real consumer spending looks like it's growing at a 5% to 5.5% rate, you can afford slower growth in that 0.2%."

That is a reflection of an economy that is no longer based in manufacturing, pointed out Shawn Johnson, director of research at

State Street Global Advisors

.

"There's been a systemic change," he said. "We've switched to a services-based economy. You tend not to export services. Because of that, we're more insulated."