The bull isn't over, but returns will be modest - frustrating both strong bulls and bears. Also, expect wide performance dispersion among categories and leadership changes. I call it the year of the "alpha-bet".
In any year, stocks can do one of four things - rise a lot, rise a little, fall a little, or fall a lot. Up-a-little is most likely for 2011, down-a-little next most likely and up-a-lot third - least likely is down-a-lot.
Why? 2011 is this bull's third year - starting in March. Third years are often modestly positive or mildly negative, sometimes very strong, but not terrible. Average returns for a third year are just 3.66% (in US stocks, for which we have vaster historic data). Strip out the down years, and the average of positive third years is 10.8%. Not bad, but still not huge. After a couple of strong years, 2011 will be more like 1960, 1977, 1994 and 2005 - pauses that refresh before the bull market's next big up-leg.
Stocks surging out of 2010's correction helped improve sentiment.
Now, there are too many optimists for "up a lot" to be likely. Too many über-bears too! But little in between - giving us a bifurcated, barbell sentiment display that's rare but not unprecedented. These strongly opposed forces almost offset each other - like a volatile sideways tug-of-war. I call the market The Great Humiliator - it wants to humiliate as many people as possible, for as much money as possible for as long as possible. It's exceptional at it. Now the best way to do that - annoy both bulls and bears - is to have stocks be flattish this year.
Ken Fisher
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