The reason why the indexes didn’t move much had to do with economic news. The Commerce Department reported factory orders for November that were twice as good as what had been expected. This good news was offset by data that the National Association of Realtor’s Index of Pending Home Sales dropped 16%. That was the first drop in nine months.

Plus, dollar started trending higher again, moving up almost 1%. Not only did this put pressure on the stock market, but it also helped push down the price of spot gold by 3.35%.

When you look at the technicals, the market is pretty overbought. Don’t get me wrong, if the technicals were overbought and everyone hated the market, I’d probably take it as a sign of higher prices. But right now everybody is bullish.

The American Association of Individual Investors Bullish Ratio hit its highest level since February of 2007. The market topped out later that year.

Another sentiment indicator, the Investors Intelligence Advisors’ Survey (they all sound the same), showed the lowest percentage of bears since March of 1987. We all know what happened a few months later…

So, while investors can stay bullish for a long time, the contrarian in me says that we’ll see a drop in the next 3-6 months. But that’s not the only reason why i think we’ll see a drop in the second half of the year.

During a typical recovery, the inventory rebuild leads to more jobs, which leads to more domestic consumption, which finally starts a growth cycle. But right now, consumers are up to their ears in debt. Most have been laid off. And a good number have seen their hours cut. People out there are picking and choosing what bill to pay. And the credit card ends up being the last one.

Consumer demand can’t take off in that type of environment. Cash is tight. And the next dollar is used to pay the next bill.

To make matters worse, the Fed may end up tightening in response to this inventory rebuild and the effects of the stimulus. Could the Fed be so stupid? Sure they could!

Listen, the Fed typically begins tightening as soon as job growth begins. Over the next 12 months, the US government will hire up to 1.4 million people for the 2010 census. And even though these 1.4 million jobs will probably only last about 6 months, it could definitely push the labor market up over the next few months.

It’s enough to make you go “hmmm”.

An overbought market with record bullishness… poor consumers… and tighter money, spells a recipe for a nasty second half.