Forget a 10% correction, which many bears say is long overdue. It has been 121 trading days since the S&P 500 has had a 2% correction.

James Bianco of Bianco Research points this out in his "daily news clips" report Thursday, adding that there are no cartoons to highlight because there isn't enough bad news to poke fun at. The dearth of cartoons, plus the longest stock market stretch without a 2% correction since 1995, could be reason enough to get investors nervous about the stock market's five-month rally.

A bit of a pullback might be a good thing, as the market seems jerky and eager to buy or sell on the slightest hint of a trend.

"Hopefully we can see a slow correction," says Rich Ishida, chief technical analyst at MarketVane, a research company that specializes in market sentiment. "Going sideways to lower for the next week would be good to get the anxiety out of the market."

Thursday's trade was uneven as investors' anxiety seemed to build, though the major averages reversed earlier losses and ended the day in the green.

The Dow Jones Industrial Average spent most of the day in the red, but finished up 0.05% at 12,480.69. The S&P 500 also reversed a weak start to finish up 0.12% at 1418.34. While the Dow and S&P were restrained by weakness in energy stocks (crude fell to its lowest level in 18 months), the Nasdaq Composite rallied sharply, closing up 1.25% to 2453.43.

Thursday's Nasdaq rally was spurred by strength in the biotech sector, with analyst upgrades spurring ImClone ( IMCL), Amgen ( AMGN), and Genzyme ( GENZ), whose shares rose 4% to 8%.

Among pharma stocks, Merck ( MRK) was also upgraded, and added 2.5% on the day.

Tech shares, meanwhile, rallied following a Bank of America upgrade of Intel ( INTC), whose shares jumped 4%. Among other big-cap tech, Research In Motion ( RIMM), Yahoo! ( YHOO), Electronic Arts ( ERTS) and eBay ( EBAY) were big winners, up between 4.7% and 7.8%.

Aiding the tech rally, the November factory orders report revealed a strong rebound in computer buying. Orders for computers were up 53.4% in November, compared with a 34.2% decline in October. Overall factory orders were up 0.9% in November, weaker than the 1.3% increase analysts expected, but still better than October's 4.7% decline. But orders for metals, machinery, electrical equipment and furniture declined. (Commodities like gold and copper followed oil lower again Thursday, which may portend less inflation but also makes investors nervous about the economy.)

Meanwhile, the Institute for Supply Management's index of non-manufacturing activity showed the services sector is still chugging along. It read 57.1 in December, in line with expectations for a reading of 57.

Wild Start to '07

The first two days of January have been marked by midday reversals on little solid news. The FOMC minutes Wednesday didn't present anything the market didn't know, and Thursday's news was relatively benign despite headlines about "weak" December retail sales reports that were actually mixed .

The action in this shortened trading week suggests market participants worked out their forecasts for the full year 2007, concluding it will be good for stocks. It seems investors and strategists can't find a reason not to be bullish, but they know the rally can't last forever.

Sentiment readings on the market are mixed. Notoriously the last to know, individual investors are suddenly getting bullish after never really getting upbeat amid the Dow's run to record highs in November and December. The American Association of Individual Investors shows a reading of 49.14% bullish as of Thursday, its highest since the week ending Nov. 9. On the other hand, MarketVane's Bullish Consensus shows that S&P 500 futures traders are 69% bullish -- the measure's first reading below 70 since September.

John Roque, the senior technial analyst at Natexis Bleichroeder, summed up many strategists' feelings Thursday: "You might be eager to place us in the bullish camp given that we're sending out a report detailing seven big bases with upside potential," writes Roque. "Rather, we're just as eager to talk to you about shorts. But we'd like to do that in person."

Roque writes that Mattel ( MAT), H.J. Heinz ( HNZ), SunTrust Banks ( STI), Abbott Laboratories ( ABT), General Electric ( GE), Weyerhaeuser ( WY), and Verizon ( VZ) all have established strong four- to eight-year bases, or tight ranges. Each has begun to relatively outperform the S&P 500 within the past year, and that means they could be ready to break out of said ranges.

Merrill Lynch quantitative strategist Savita Subramanian, on the other hand, published his list of 17 stocks that might make good candidates for shorting. Titled, "The Run is Done (RID) list," Subramanian lists stocks that significantly outperformed in 2006, but are "at risk of underperforming in early 2007."

All of the stocks on the list outperformed their relative sector indices significantly in 2006. They also outperformed the S&P 1500 and they have neutral or sell ratings from their fundamental industry analysts at Merrill Lynch.

These shares are now at risk of underperforming for two primary reasons, he writes. First, after holding onto the best-performing stocks through their year-end reports and reviews (a.k.a. "window dressing"), portfolio managers may now feel safe letting them go. Also, investors might unload these high-return stocks in January to avoid short-term capital gains taxes.

Subramanian's list includes DirectTV Group ( DTV), which returned 77% last year; General Motors ( GM), which was up 58% in 2006; Terex ( TEX), which returned 117%; Boston Properties ( BXP), which tacked on 51%, and; Deere ( DE), which added 40%.

On the heels of less-than-stellar retail sales reports for December, Birinyi Associates says investors shouldn't dismiss the retailers in the post-holiday season. The firm notes that retail stocks generally trail the overall market's performance in the period from Thanksgiving to year-end, as was the case in 2006, writes Birinyi analyst Paul Hickey.

Retailers tend to outperform the market in the first two months of the year, he writes. In particular, consumer electronics companies are the best performing group post-holiday, after faring the worst during the holiday season. Hickey notes that Best Buy ( BBY), Circuit City ( CC) and RadioShack ( RSH) finished the year at oversold levels amid negative sentiment. "The opportunity exists for at least a short-term rally in these names," he writes.

Outside of such pockets of opportunity, however, the market remains overbought, and traders are unsure what to expect from the economy, the Fed and corporate earnings. With December's payrolls on tap Friday morning, it seems like a setup for a letdown -- or at least more volatility.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click here to send her an email.