Cuttone and Co. Inc.

Today marks the forty-first anniversary of the release of Led Zeppelin’s eponymously titled debut album. The odd moniker was allegedly adopted after a remark that Keith Moon reportedly made to the band members (“Well, that went over like a lead balloon”) after a poorly received early gig. Despite that inauspicious beginning, during an appearance at a club called The Boston Tea Party two weeks after the album’s release, the audience refused to let the band leave the stage at the conclusion of their scheduled one-hour set. The band began to riff on everything and anything they knew and suddenly a new phrase entered the musical conversation. To hear bassist John Paul Jones’ retelling “There were kids actually banging their heads against the stage – I've never seen that at a gig before or since, and when we finally left the stage we'd played for four and a half hours…. I suppose it was then that we realized just what Led Zeppelin was going to become.”

The only head-banging being done these days is by investors who missed the great rally of 2009 and as the market continues to grind modestly, yet inexorably higher, traders are finding that in the early days of the new year the song remains the same as it was in late December.  If stocks can sustain these gains as we move deeply into the depths of a brutally cold winter, how long will it be before investors decide that dancing days are here again and send the market another leg higher? The next couple of weeks may provide the answer.

With several months of aggressive corporate cost cutting behind us, investors are betting that the emergent recovery has lifted fourth quarter earnings. Corporate guidance has been positive in recent months and assuming that there hasn’t been a widespread communication breakdown, analyst expectations of a 184% YOY increase in profits for the S&P 500 should be exceeded. Banking stocks in particular should lead the way, however, if Alcoa’s disappointing report is any indication of what we can expect, this earnings season may turn out to be a heartbreaker.

As always, there is no shortage of conflicting opinions on the market. Most investors appear to have positioned themselves for a return of good times, bad times having temporarily been banned from the public discourse. While momentum still appears to favor the bulls, caution is in order. A stubbornly high unemployment rate continues to undermine the housing market and some bears are expecting a return to the crisis conditions of last spring. While I don’t expect things to deteriorate calamitously, there remains the possibility of a sharp pullback should economic conditions throw a fright into the market. I still believe that investors aren’t fully invested on an emotional level and any signs of trouble could lead to the correction that many have been predicting for months.

Many traders claim that they intend to buy on just such a decline, yet I suspect that when it comes to pass the dip will be sharp enough that most will be too dazed and confused to act.