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Market Preview: Beware the Low-Volume Rally

Tickers in this article: ^DJI ^GSPC LOW BRK.B PCLN

NEW YORK ( TheStreet) -- Eight weeks into 2012, the S&P 500 is batting .875 , it's cool to be bullish, and the G20 is reportedly putting together a $2 trillion rescue plan to solve Europe's debt crisis once and for all.

That's a scenario that would have seemed almost unfathomable back in early October when the market scraped its near-term lows.

And yet, there are still some negatives to keep in mind. This has been a low-volume rally for the major U.S. equity indices, indicating a possible lack of deep-seated conviction in the so-called risk-on trade.

According to Deutsche Bank , trading in the S&P 500 components is down 20% from last year.

This is also reflected in the ongoing popularity of bonds. Last week, long-term mutual funds investing in bonds saw inflows of $8.2 billion, while funds investing in equities saw inflows of just $1 billion with just $35 million of that going into funds investing in U.S. stocks.

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The economic data are getting better, but there is still some trepidation out there about what a recession in Europe means for the progress that has been made stateside in the last six months. Don't forget rising energy costs either. They hit the all-important consumer in the wallet immediately. Gas prices at $4 per gallon and the Dow at 13,000 may not mix.

So corporate earnings this past reporting season must have been great, right? Well, not really. FactSet Research said Friday that the blended earnings growth rate for the fourth quarter sits at a pedestrian 5.9%, with 454 of the S&P 500's components having opening their books. Take out Apple(AAPL) and AIG(AIG) , and the rate drops to 1.1%.

And while analysts are bullish that strength in the U.S. and emerging-market economies in the second half will stoke earnings growth toward the end of 2012, the present isn't exactly boom times.

According to FactSet, analysts are projecting a year-over-year decline in earnings of 0.4% in the current quarter with the second and third quarters pegged for single-digit percentage growth of 6.8% and 4.4%, respectively. Not exactly the kind of growth that justifies new all-time highs for the major averages.

The machine is supposed to kick in the fourth quarter of 2012 with growth expected to jump up to 15.7% to be followed by 14.8% in the first quarter of 2013, but those kind of numbers would in part be a product of the mediocrity afoot right now. Those projections also assume that everything works out in Europe over the next year, by no means a sure thing.

Just some food for thought: 2012 has barely seen any profit-taking, but there isn't much precedent for stocks skipping higher indefinitely. And because the rally has been on such low volume, the pullback could be the opposite and strike with stunning ferocity.