The Stock Market & Economy:
My View on 2011

2010 stock market in reviewHappy New Year!

In 2010, small-caps were the runaway winners, with the Russell 2000 closing up 25.28%. Technology also provided some decent gains, with the NASDAQ up 16.88%. Lagging were the blue-chip DOW and S&P 500 companies, which ended up 11.02% and 12.74%, respectively. U.S. stocks outperformed the Chinese Shanghai Composite Index (SCI), which closed down 14.31% following stellar gains in 2009.

It looks like a Santa Claus Rally is in place given the gains, albeit small, during the last five trading sessions of 2010 and the first session in 2011.

Small-caps and technology are still leading the markets higher, continuing a trend from 2010. The Russell 2000 is up over two percent and broke 800. The S&P 500 is above key resistance at around 1,250-1,260. The DOW broke 11,700, while the NASDAQ tested 2,700.

While just starting, a strong beginning to 2011 could signal another positive year. Historical records indicate that stocks have increased an average of 1.6% in January since 1969, according to Stock Trader’s Almanac.

For 2011, I expect small-caps and technology to lead again in 2011 as long as the economy continues to recover. An improved jobs market will only help.

The fact that the economy is expanding in spite a lack of strong jobs growth is encouraging. We are seeing what economists call a “jobless recovery.” And this will likely continue in 2011, as the unemployment rate is expected to remain high, but the $858-billion tax extension President Barack Obama instated will help to drive consumer spending and economic renewal.

The charts of some of the key stock indices continue to look positive and point to potentially more gains after the break at the previous chart tops. I’m encouraged by the ability of the major stock indices to edge higher after breaking the previous chart tops.

Large-cap technology continues to show encouraging signs towards tech spending. I expect tech and small-caps to drive trading again in 2011.

While I’m not a big believer in assigning targets for indices, I do feel that markets will edge higher in 2011 but the road to gains could be similar to 2010—rocky and requiring caution.

If all goes well, we could see the S&P 500 test 1,400 this year. How much the index rises above 1,400 will be dependent on the global and U.S. economies. My top areas include technology and small-cap stocks. Areas in technology that look promising include the Internet and wireless. I also like the banks, as the balance sheets strengthen and loans increase.

Wall Street is also bullish.

Bank of America Corporation (NYSE/BAC) predicts that the S&P 500 will trade at 1,400 in a year driven by technology and energy.

Other estimates include:

J.P. Morgan – 1,425

Barclay Capital – 1,420

Goldman Sachs – 1,450

But what I’m concerned with is the debt and growth situation in Europe.

Europe is a region of concern in my view because of the muted growth and rising debt and deficit levels in Greece, Spain, Portugal, Ireland, Italy and Belgium. If not for capital from Germany and France, it would be far worse there.

Traders appear to have brushed aside the mounting debt and deficit issues in Europe; but, be warned, they are not going away anytime soon. At least, that’s my opinion.

My advice to you is to not be overly focused on the domestic issues. You need to seriously monitor the debt situation in Europe. There have been some positive earnings news from European firms and sentiment in the Eurozone has been encouraging, but we need to see this reflected in the region’s growth.

Outside of the United States, I like the BRIC countries, comprised of Brazil, Russia, India and China. Also take a look at the smaller Asian countries such as Malaysia, Indonesia, Korea and Taiwan.