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Bull, Bear, Whatever: Sentiment Matters More Than a Name


As we wind down the year, fraught with fear over what our our elected leaders might — or might not — do to us, I am starting to get the feeling that 2012 might go down in history as the best party Wall Street ever threw that no one attended.

I say this as the S&P 500 sits on an above-average 12% year-to-date gain, at a time when investors have yanked $125 billion dollars out of stock mutual funds, and when average daily trading volume is off by 19%.

"There's an old saying on Wall Street that 'volume confirms price.' Technicians want to see rising price on rising volume," says Nick Colas, Chief Market Strategist at ConvergEx Group, in the attached video. "But what we have here is the opposite. We have rising price on declining volume."

And that, my friends, is not only weird, it's worrisome.

While Colas says investors spend too much time trying to name the market a bull or a bear, his analysis shows that "most people don't feel all that good about this rally" and that the prevailing performance driver is sentiment and, ultimately, good old-fashioned fundamentals.

At the same time, he points out that if it wasn't for the rampant (and much maligned) activity of high-frequency traders, the situation would look even worse.

"It is an area of suspicion that high-frequency trading masks, either the volatility that we should be seeing, given what's going on in the world, or even masks the underlying trend of the market, which might be more of a stagnant nature than the rising market that we've seen this year," Colas says.

As a result, he's advising clients to get ready for less, calling 2% to 2.5% GDP growth the new normal with earnings growth no better than 4% or 5%. Add that up and you find yourself in an environment of lackluster returns, sporadic performance and increased volatility.

If that's not for you and "you're not willing to eat the volatilty," then he says you might want to consider putting your money to work someplace else.