Most of the major stock market indices rallied to new 52-week highs last week. This appears to be a flood of money from index funds and mutual funds all putting cash to work. While I am surprised by the strength of the rally I'm not surprised by the timing. It's common to see stocks rally in the beginning of a new year or quarter. Unfortunately this is a short-term effect and will eventually run out, which isn't necessarily a bad thing - more on that later.

The bigger surprise last week was the December jobs report. As of Thursday a Reuters survey had seen consensus estimates rise from -8,000 jobs to unchanged for job losses in December. There were plenty of individual estimates well above zero with a couple in the +80K to +100K. Imagine their surprise when the Labor Department said non-farm payrolls for December came in at minus 85,000 jobs.

Now it wasn't all bad. The two-year string of job losses was broken as November's -11,000 jobs was revised to +4,000. Unfortunately October's job losses were revised lower. I guess it's possible that if they're still revising October's numbers then November's could get revised lower again. Overall Friday's report illustrates that the job situation is going to be a tough one to change. What happens next month when the January jobs report counts all the seasonal holiday workers that were laid off after New Year's?

I've been suggesting that the stock market could see a correction in mid January starting Monday, January 11th and heading into the first real week of earnings about two weeks from now. That is still a possibility but I'm willing to admit last week's rally has certainly seemed to diminish it. It's entirely possible that the correction will not show up at all. However, another scenario could be stocks slowly drift higher into earnings, then see a spike as investors react to better than expected earnings news, only to form a top. Once the earnings news is out there is nothing left to drive stocks higher and then we see a correction.

While waiting for the correction might sound a bit scary it shouldn't be. Yes, we will have to monitor our stop losses on current trades but we WANT to see a correction to provide a better entry point into 2010 and beyond. Now everyone is entitled to their opinion and I still believe we face a very real threat of a double dip recession.

This past week I heard one analyst sharing his thoughts on the subject and he too felt that we will see a double dip. The last six months of 2009 were boosted by government stimulus. While we still have government stimulus to spend it won't be at the same elevated rate. I think politicians know this and that's why there has been talk of another stimulus package. Unfortunately (or fortunately depending on your outlook) getting another stimulus package through congress is going to be extremely tough.

Additional concerns that could lead to a double dip will be state and local governments cutting back on spending since tax revenues are down. Net exports will weaken. The consumer will turn more defensive and the consumer savings rate will stay elevated. This will have a very negative impact on the economy, which is 70% consumer spending. Businesses will be reluctant to hire workers. Jobs will remain tight with unemployment stubbornly high and foreclosures will continue to plague the housing market.

Sadly I can't tell you when this will all come together to produce the second dip. I have warned readers before that the first couple of quarters of 2010 should be positive for the economy. It's going to be tough to stick to the double-dip outlook as the media seizes on the positive headlines. There will be plenty of talking heads on TV forecasting good times.

Right now a good guess for trouble could be third quarter 2010 or it could be sometime in early 2011. Until then we need to play the market in front of us, which is bullish, but keep a wary eye on the horizon. It may be sunny now but it looks like a storm coming several months down the road.

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