The Coming Correction

from Barrons:
Stocks' 1% drop last Wednesday provides at least two tests. The first, naturally, is a test of the unrelenting and metronomic uptrend in the market that has prevailed since about Labor Day, with only the briefest backslide in November. The demand-versus-supply breakdown has clearly been in favor of higher stock prices; investors have been under-exposed to equities, and sellers largely remained at bay.
Then last week, with the hottest stocks—small-caps, momentum-driven tech and commodity shares—taking a stiffer hit than the big-cap indexes, there were hints the hot money might be taking a breather. How like this market to hit a new post-crisis high, and then shake out the excessive optimism among Wall Street pros right when Apple (ticker: AAPL) reports a stupendous profit performance. When the U.S. stock-market's capitalization doubles in 22 months. When retail investors invest more cash in U.S. equity mutual funds than foreign funds for the first time in recent memory, according to Lipper. When the economic data generally are upbeat. And, not least, when President Obama begins snuggling up to business.
Even a further probe of a few percentage points to the downside likely wouldn't augur anything too serious. During this nearly two-year bull run, earnings-reporting seasons have often served as times for consolidations and pullbacks. It would be helpful to the bulls' cause if this little setback were met with a sudden cooling of expert and trader sentiment and a demand spike in hedging instruments. In the words of Robert W. Baird strategist Bruce Bittles, "Before the current slide runs its course, we should see a resurfacing of caution and skepticism among investors."
The other test is being administered to the growing and increasingly vocal crowd insisting that the low-volume, low-volatility sleepwalk to new bull-market highs is evidence of a market rigged by the Federal Reserve and not allowed to decline meaningfully, with every intra-day dip rescued by what even a technical analyst quoted by The Wall Street Journal Tuesday called a "mysterious force."
Well, sure, the Fed wants to see equity markets move higher. All post-recession, ultra-easy Fed regimes in history have desired, if not engineered, rising stock prices. The main difference with the Bernanke Fed is that the chairman is honest about it, having cited higher stock prices both in an op-ed article and this month in a talk at the FDIC as one barometer of the success of its "quantitative easing" campaign. The phrase "Don't fight the Fed" is decades old, let's recall, which doesn't mean it has always been a great investing guide.
The more interesting question is whether the investment community came into this year so convinced that the Fed and assorted other actors somehow wouldn't let stocks drop meaningfully that the market's knack for confounding group expectations means just that might happen.