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Markets in Sweet Spot ?

Markets welcomed new year with enthusiasm with first day DOW going up by 150+ points and S&P climbing up by 2.6% in first week itself. My recommendations in first post of 2010 did even better - they were up by nearly 17% (assuming you had bought on first trading day of year). One would be excited to get such return in a year. Now that these picks have returned 17% in one week, what should one do ?

To answer that, let's look at where markets and economy is heading. I think markets have found a nice sweet spot. Here are positives which are going for markets:
  • Economy is coming out of recession
  • Interest rates would remain low for quite some time
  • Inflation is till muted
  • Companies would have top-line growth due to increased consumer demand, inventory buildout and exports
  • Companies would have bottom-line growth since they have been very careful in increasing headcount or other expenses
  • 60% of stimulus funds are going to be spent in 2010
  • No significant profit pre-announcements before earnings season starts on Monday
  • Pace of GDP growth for emerging countries seem to be picking up
So there are quite a few positive factors, let's not ignore some of the speed-bumps:
  • Unemployment still at 10%
  • Commercial real estate market still faces decreased valuation causing potential trouble for banks
  • Once stimulus spending is done, unless private sector demand picks up, could slow down recovery
  • With commodities shooting up, inflation is around the corner
  • If expectations of inflation picks up, Fed would have to raise interest rates sooner than markets would like
  • To burst the asset bubbles in emerging countries, governments would rein in spending and raise interest rates. We had already seen this in Australia, Israel and now China
Evaluating both +ve and -ve factors, my prediction is that markets would be trending up potentially reaching 11000 in next few weeks on positive earnings momentum. However what happens after Mar 2010 would be another story for another blog !

As far individual stock recommendations, I would still recommend 10 picks of last week. After all they cumulatively still have 30% upside left.

Good luck investing !

/Shyam

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