Market Outlook: January 31, 2011

The market is unthinking and unfeeling, though sometimes it feels as though the market is malicious. Not too long ago, I made a large deposit and bought a number of stocks. That’s almost reason enough for the market to undergo a correction, just to make me to worry that I made a mistake or that it will permanently impact my net worth.

Joking aside, stocks have risen so far and fast that I am starting to become concerned about a pull back. If stock prices drop, I wouldn’t expect them to fall far and I would expect the correction to be relatively short-lived. There is still quite a bit of fear from the crash of late 2008, early 2009, so it’s unlikely that stocks will get too far ahead of themselves this soon. At the same time, earnings season is upon us and expectations seem to have caught up with reality. We’ll probably see increased volatility as some companies outperform and others miss.

Yield curve flattened slightly, while inflation rose, both of which typically indicate a strong but weakening economy. Although a bear market doesn’t seem likely, it’s more likely than it was a few weeks ago. The stock market has gone pretty much sideways since about the 10th of December, or the past seven weeks. Stocks still have positive momentum when compared to bonds, but the rate is falling.

Stocks have risen so far and fast that I am starting to become concerned about a pull back. If stock prices drop, I wouldn’t expect them to fall far and I would expect the correction to be relatively short-lived. There is still quite a bit of fear from the crash of late 2008, early 2009, so it’s unlikely that stocks will get too far ahead of themselves this soon. At the same time, earnings season is upon us and expectations seem to have caught up with reality. We’ll probably see increased volatility as some companies outperform and others miss.

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