I've spent most of the last decade pontificating about the risks and opportunities created by stocks, housing, bonds, precious metals, or some other market that was grossly mispriced. All we needed to do was position ourselves long or short, take the pain while irrational speculators proved they could be even more irrational, and ... ka-ching!

Well, we’ve arrived. Insanity is finally out of fashion. Excluding the occasional aberration, greed and fear are scaled back. All that money the Fed printed might eventually turn into inflation causing the dollar and bond prices to plummet while the price of hard assets and at least some foreign currencies and markets benefit. But the operative words now are “might” and “eventually”. "Might" no longer means Will and “Eventually” no longer means Inevitably. For now at least, the Fed is buying up all those excess TBonds, inflation is no threat, home prices are balanced between the downward pressures of continued foreclosures and the upward pressure of being more affordable than they have been in decades, corporations are refocused on controlling costs, and the wonder of wonders; Americans are actually cutting back on consumer credit and saving!! Now that his reappointment is in the bag, Ben Bernanke might even step up to the plate and morph into Paul Volcker before inflation gets out of hand.

That is not to say that our problems are behind us. The Federal Government is adding debt much faster than individuals are reducing it. The political pressure to keep interest rates too low for too long may prove irresistible. The US dollar is again ratcheting lower in the currency markets and there are still millions of vacant houses, high levels of unemployment and underemployment, and tens of thousands of commercial properties sitting vacant. For us however, this balance is mostly priced into the financial markets. The compelling case for investing in US stocks and lower quality corporate bonds simply because they were cheap has vanished in the vapor of higher prices. Similarly, the prospect of financial Armageddon is behind us.

Although I pride myself as a contrarian, today's “cautiously bullish” consensus is probably correct. Our oft repeated 2009 target for the S&P of 1050 is only slightly above current levels. A few weeks ago our proprietary sentiment indicator generated a minor short term sell signal that is still in place. Since then, prices are effectively unchanged, down a couple of percent or up a few percent depending on which day you check. In the last few weeks, stock traders appear to have adopted the strategy we have used all year: buy stocks whenever prices dip. With everyone buying the “dips,” they have gotten too small to be useful. That buying makes a double digit decline unlikely from current prices. Double digit gains that will take us above 1100 on the S&P are just as unlikely, unless preceded by at least the correction posited by our sentiment gauge.

We currently hold a much smaller than normal exposure to stocks and expect to enjoy about half any market gains and suffer about half any market setbacks. If and when the market corrects, we will increase that exposure but are disinclined at these levels to take on more equity risk when the reward opportunity appears so limited. The hardest thing for a professional trader to do is often the wisest; stop and smell the roses.