Big picture the sell-off on Friday, January 15th wasn't that big or that significant but it could still be a warning sign. Last week I suggested that the market could see a scenario where stocks run up into earnings, spike on the news, and then reverse lower into the correction we've been waiting for. This remains a very real possibility, especially if the reaction to Intel's and JPMorgan Chase's earnings reports are any indication. Both companies beat Wall Street's earnings estimates and yet investors sold the news anyway.

I feel somewhat vindicated that JPM's CEO Jamie Dimon also believes that the second half of 2010 could be trouble. Dimon's cautious comments and JPM's significant rise in loan loss reserves spooked investors who were looking for the "all clear" signal that the worst was truly behind us. Dimon is naturally concerned about the record-high unemployment and a very fragile housing market. Regular readers to this column know that I'm expecting another tidal wave of foreclosures in 2010-2011. That's not going to help consumer confidence.

Speaking of the consumer, last week we saw the consumer sentiment index rise from 72.5 to 72.8. It is improvement but economists were looking for more. The combination of December's decline in retail sales could be an ominous sign for the future. Last year one of the big arguments was that Americans fundamentally changed their spending habits. Job insecurity (or losses) combined with plummeting retirement savings and falling home values has increased our savings rate. Now for a country's economy that is 70% consumer spending that's definitely going to slow things down.

On the positive front we're definitely seeing some improvement in the manufacturing data. The New York Empire State index witnessed huge improvements in both the overall reading and the new orders component. This helps reinforce the positive improvements in the wholesale inventory reports. We've been waiting for the massive rebuilding cycle for months and it looks like the cycle may have begun.

I remain very cautious on the market. The trend is still up for the major stock market averages and the transportation index but we are starting to see some bearish reversals and breakdowns in the smaller, sector indices. Those that haven't reversed yet look extremely overbought and due for a correction. Remember, we're not afraid of a correction. We want to see stocks retreat so we can buy the decline when it starts to bottom out. Be patient and wait for your entry point!

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:


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