Second Guessing?

Recently the markets have hit a real ceiling - even on the back of a good monthly jobs report (showing only 11,000 jobs lost in Nov. with serious positive revisions to prior months), the market couldnt jump higher. Technically speaking, the wall was at 1117 and 1112 - or ceiling I should say. The support level was 1097. After rallying and retreating to these ceilings 3 days in a row, the market has now teetered south of support and is finding new ground with its 1091 support level. For reference sake, support exists around 1085 and strongly around 1075 before really falling off to 1025. (Remember how quickly we jumped up - thats good news but it also means weak support for stopping freefalls).

So is that it - the markets are bummed out and refuse to keep the rally going - everyone is in and there is no extra cash to fuel more profits??

Maybe, but doubtful. True the easy money is over - but that same framework exists to keep the market up and even push it marginally up throughout 2010 despite choppy seas. What sparked the recent rally?

(1) Economic improvement --- via government spending and stimulus. Bad news = government stimulus and its effects are waning. Good news (kinda) is that the government wants to pump more money out via infrastructure projects, small business lending and green efforts. While this won't be quite the boost that cash for clunkers was for autos - it will bolster and help unemployment as well as provide some help for growth. If nothing else, it delays the handoff from government stimulus to the private sector (which is good - in the short run - since the private sector isn't ready for STRONG growth on its own).

(2) Easy, cheap money -- the government, despite a good jobs report for November - has continued to indicate that it believes that rates will need to stay near 0% for most of 2010. As long as this remains, then the value of the dollar can't increase too much and will eventually resumes its decline in value. This means easy trades in oil, gold and other commodities for large institutions and more profits for corporations (esp with overseas sales). This status quo has been responsible for at least 30% of the recent rally, so while it could reverse eventually - the fact that the Fed is keeping rates at 0% is good for the short run, time being.

(3) Just comment here really -- the market did in fact get ahead of itself and is currently based partly on a bubble trade of a cheap dollar, commodity speculation and 0% interest rates. That being said, the continuance of these things will keep the market from retracing too much. And the minimal growth (or esp the government induced growth) in 2010 will lead to corporate profits, eventual hiring and thus market increase in value. It will be the already over-valued market tugging against these (now diminished) chains of growth that will keep the market range bound between 1025 and 1200 for the year in my humble opinion. Bad for long term gains but good if you want to get fiesty and try to trade the market throughout the year.

(4) Group think -- part of the market rally was honestly based on a "I'll join because others are joining" and "we have to get good returns to keep our jobs as brokers after last year's demise". Seriously. But now that 2009 has ended and brokers will book their big gains for the year saving their credibility and jobs with bosses and clients alike, look for them to take a much more cautious approach to 2010 - investing significantly in large cap value companies and safeguarding the "gains" they managed to salvage for their clients and their clients retirements -- after a horrific 2008/early 2009.

(5) Housing & the Stabilized Consumer -- yes unemployment is bad and getting a little worse probably. Yes, there are tons more foreclosures to come and the housing industry is being propped up by artificial incentives for sales. But the incentives are scheduled to continue and the consumer (albeit constrained and diminished) appears to have stabilized and this new, low level. And corporation have learned how to make profits at this level. So again, while the consumer will not contribute meaningful, big growth, there will be some growth and (more importantly) no more significant declines. It may be bad to say we can only go up from here but it appears that a bottom is in and, even if we dont go up quickly or hardly at all, status quo (again) means some room for gains.