It looks like 2009 could go out with a bang as the major U.S. averages soar to new 52-week highs. The S&P 500 is up 69% from its March 2009 lows. The NASDAQ is up 80.6%, the Russell 2000 is up 81.6%, and the Dow Industrials are up 62.6% from their March 2009 lows. Year to date the S&P 500 is up 24.6%, the NASDAQ Composite is up 44.8%, the Russell 2000 is up 27.0%, and the DJIA is up 19.8%, making 2009 a pretty good year for investors.

This past week investors ignored the lower third-quarter GDP revisions and focused on positive expectations for the fourth-quarter GDP. Short-term the bullish breakout in the S&P 500 should herald a new leg higher for stocks. However, the rally in the Russell 2000, the NASDAQ, and the SOX semiconductor index has been so sharp that these all look overbought and due for a correction. Of course they could always grow more overbought before they pull back. More importantly the trend is up for now. Not only could we see window dressing by fund managers in the last four days of the year but investors both big and small will be loathe to sell their positions now and create any capital gains they'll have to pay taxes on in April.

You can imagine that if there is a large number of investors just holding their breath and waiting to lock in gains once the calendar year turns over it could make January a challenging month. While it might be disappointing to be thinking about a correction after the S&P 500 just broke out from a six-week trading range it is a strong possibility. Fortunately I see it as a potential entry point for new positions. Right now the tentative game plan is to look for a two or three week decline in mid January and then be ready to buy the bounce when earnings season begins (which is about a week after Alcoa reports).

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

Chart of the Russell 2000 Index:

Chart of the NASDAQ Composite:

LONGER TERM OUTLOOK

Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown

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