The year 2009 may be gone but it could be many more months before investors will be able to look back and decide - was 2009 one of the biggest bear-market rallies of all time or was it the beginning of a new bull market?

When stocks finally began to bounce in March 2009 many investors didn't believe it. If you bought the bounces in 2008 you were crushed as stocks rolled over and plunged to new lows. Then as the rebound from March gained steam more and more traders were forced to cover their shorts. Disbelief turned into panic that the market was going to rally without them. Money managers felt forced to put money to work lest the market run away from them. The chase for performance powered stocks higher and higher. Yet the rally began to lose steam in November and the chase for performance turned into a waiting game as managers try to run down the clock on 2009 to hold their gains. The fourth quarter on 2009 is finally over and a new game begins. With the starting gun for 2010 about to go off money managers are no longer faced with the same need to chase stocks higher.

On a short-term basis the market is in jeopardy of big investors looking to lock in their 2009 gains and that means selling. The major indices are overdue for a significant correction. While there is no guarantee one will occur it makes sense that it happens now in January. Traders can sell now and push any tax consequences out to April 2011. I would like to think the market will just trade sideways as we wait for the next jobs report due out Friday, January 8th. However, the very late-day sell-off on New Year's Eve cast an ominous shadow that the correction may have already begun.

The first week of January will see a handful of economic reports but the real headline report will be the non-farm payroll report for December (due out before the bell on January 8th). Economists are expecting a gain of 25,000 jobs. Odds are really good that the last job report of -11,000 could be revised into positive territory. However, the question is, will stocks rally on a good report or will investors just sell the news since a positive number is already expected?

I know I'm repeating myself but I strongly suspect that stocks could correct into the first week of earnings season (about the third week of January). If the first round of major earnings reports are positive that's when I would expect stocks to bottom and this is where I think our next bullish entry point could show up. However, I want to remind readers that while the first half of 2010 is setting up for a positive bounce in economic data it's the second half I'm worried about. Keep an eye on the dollar. The oversold bounce in the dollar appears to have grown into a more significant rally and that's going to put pressure on commodities.

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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