NEW YORK (Reuters) – Stocks may have kicked off 2011 with a no-holds-barred surge but anyone predicting a sustainable rally through January may be overly optimistic.
Many warning signs reveal a market that is ahead of itself after the best December for U.S. stocks since 1991.
More signs of economic expansion in key economies, accommodative U.S. monetary policy, and upbeat forecasts for corporate earnings underpin the latest moves higher.
But the question now is how much of last month's gains were robbed from January.
"I do think that the best December for equities in almost 20 years has likely brought forward some of the performance we might typically see in January, so I expect the pace of the market's advance to slow," said David Joy, chief market strategist at Columbia Management, who helps oversee about $340 billion in assets.
Some caution is also warranted by recent peaks in investor sentiment, said Joy in an e-mail. Major investors often warn that when most in the market become bullish it can be a sell signal as it indicates all the good news has been discounted.
Still, Joy and others said the bullishness is largely well placed, buoyed by an improving economy, growing earnings and reasonable valuations for stocks.
The CBOE Volatility Index (.VIX), a barometer of investor anxiety known as the VIX, slipped 10 days ago to its lowest level since mid-April, just before an equity rally fizzled.
In perhaps another sign of froth, a sentiment survey by the American Association of Individual Investors hit a six-year high of 63.3 percent, also in the week of December 23, but in the latest week that outlook pulled back to 51.6 percent.
While sentiment at extremes is always worrisome, Joy noted that only recently have equity funds begun to attract net new money, suggesting markets can climb higher.
Weekly investment flows into U.S. equity mutual funds were positive for the first time since the end of April, according to the latest data from the Investment Company Institute. Flows totaled $335 million in the shortened period ending December 21, compared to outflows that averaged $3.02 billion during the prior 33 weeks, ICI data shows.
As for the earnings outlook, projections for 2011 remain strong and could help to extend the market's rally.
Earnings for companies in the Standard & Poor's 500 Index (.SPX) in the fourth quarter are expected to increase 31.9 percent from a year ago, according to Thomson Reuters data.
Overseas sales, especially in emerging markets, will be a key profit driver for many U.S. companies this year, as will such sectors as materials and industrials, which led gains in 2010. Healthy corporate balance sheets should also bode well for corporate profitability in 2011.
Also helping stocks is the so-called January effect, when retail investors pour money into their retirement accounts and portfolio managers buy stocks they expect to perform well in the coming quarter and further into the year.
"Come January all of a sudden there is a big influx of cash that comes into funds that they need to put to work," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.
"The first day of the new quarter, new year, it's an opportunity to invest in some names that you won't have to show your investors for awhile," Pado said. "So they are looking for names and that is really what the whole January effect is all about."
But the outlook isn't entirely sunny. Paul Hickey, an analyst at Bespoke Investment Group in Harrison, New York, said last week that throughout December the S&P 500 closed at over-bought levels as defined by the index closing at one standard deviation above its 50-day moving average.
Still, historical data suggests strong performance for the following month after such high signs of an overextended market in the previous month, Hickey said.
In the view of Bruce Bittles, chief investment strategist at Robert W. Baird & Co, the largest negative looming for investors is the market has rallied for four months and sentiment has entered extreme territory.
"This raises the prospects of a pull-back early in the first quarter that we anticipate will be limited in both time and price. Looking further out, the weight of the evidence continues to point to higher prices in 2011," Bittles said in a note to investors.
The Wilshire 5000 index (.W5000), the broadest measure of the U.S. equity market, has gained 21.75 percent since August 26, the day before Federal Reserve Chairman Ben Bernanke announced plans to loosen U.S. monetary policy further.
(Additional Chuck Mikolajczak and Caroline Valetkevitch)
(Reporting by Herbert Lash; Editing by Andrew Hay)
COMMENTARY | Our food shopping habits have changed considerably since the Great Recession. We used to have loyalty to a single grocery store, which satisfied most of our shopping needs. Those days are gone. Shopping has become a nomadic experience, a desperate hunter-gatherer mission.
There's our local Walmart, the "all around superstore for low prices." Walmart has the best prices on a wider variety of prescription drugs. I hear people say they "hate Walmart" but people show up from many miles around. The parking lot is full of cars with New York, New Jersey and Pennsylvania license plates.
Our local Walmart "Supercenter" is a store with an indifferent attitude. Half the self-checkout counters are closed, and the staffed checkout stations are packed with customers pushing food products toward despondent clerks. The lack of polity doesn't hurt business. Trading near the top of its 52 week range , Walmart share price stand in mute witness to the food economy.
As with other stores, Walmart has not lived up to its promise of curtailing use of plastic bags. Environmentalists claim that plastic bags are cheaper and better for the environment than paper bags. Because plastic bags are cheaper, Walmart checking clerks all seem to obey an unwritten rule to put no more than two items in a single plastic bag. We bring reusable bags, bag groceries ourselves, and wash the bags weekly.
ALDI grocers sell select foods and solve the bagging problem by not having any bags or baggers at all. You lose 25 cents if you don't properly return your cart. Stores tend to be small and most everything is sold under the ALDI brands, so you're not paying extra for advertising. The bare bones operation is a good idea that saves you money, but you'll have to burn gasoline to make another grocery stop.
How far is a shopper willing to drive with gas upwards of $3 per gallon and expected to rise to $4 a gallon by summer 2011? You can compute the cost of your drive to the supermarket by using a GPS device to input pertinent data. Then add the driving cost to the grocery bill.
Giant Food Stores is closest to us and offers a gas discount of 10 cents per gallon for every $100 spent. We have a 33 mpg car with a 12 gallon fuel tank, and a 15 mpg truck with a 25 gallon gas tank. It's a no-brainer. With a current accrued discount of 30 cents per gallon, putting 20 gallons in the truck fuel tank saves $6. We use the truck for jobs that require a truck and also as an emergency fuel storage depot.
The U.S. cheap dollar policy and ethanol subsidies haven't helped food shoppers. Food shoppers find themselves in competition with livestock and oil refiners. It's just about impossible to find inexpensive Cheerios or Kellogg's Corn Flakes.
An 18 ounce box of Kellogg's Corn Flakes at Walmart costs $2.98. Perhaps it time the U.S. government ends the billion dollar ethanol subsidies — essentially pouring corn flakes into auto gas tanks.
Who can afford $3 for an 18 ounce box of Cheerios? A 2007 projection of $7 per box cereal hasn't panned out, but name brand Cheerios may indeed have become a "rich kids' food."
I'm one of those Luddites, recently ridiculed in a Paul Krugman article , who believe core inflation figures are a "stupid concept." When economists talk about "core" inflation, they don't count food prices and gasoline. Food and energy prices, included in "headline inflation" figures, are the numbers that really do matter to the rest of us.
Anthony Ventre is a freelance writer who has written for several weekly and daily newspapers, including the Palo Alto Times. He is a former news director for radio station KPEN in Los Altos, Calif. He writes news and fiction and is currently working on a crime novel.
WASHINGTON – The Obama administration says 13 companies whose deepwater drilling activities were suspended last year may be able to resume drilling without detailed environmental reviews.
Companies will be allowed to resume work at previously drilled wells, as long as they meet new policies and regulations.
The director of the Bureau of Ocean Energy Management, Regulation and Enforcement, Michael Bromwich, says the new policy will accommodate companies whose operations were interrupted by the administration's five-month moratorium on deepwater drilling, while ensuring that the companies can resume previously approved activities.
Bromwich says the firms will not be required to complete a detailed review under the National Environmental Policy Act. The companies must comply with new policies and regulations set up in the wake of the disastrous BP oil spill.