Just Another Bullish Outlook

Outlook for 2011: the economy will continue to expand, the stock market will reach 1400 SPX.

In short, I think 2011 will be a year marked by improvements in employment and a stabilization/improvement in the lagging housing and small business sectors. The stock market will benefit from these growth synergies and the available liquidity.

Here is in more detail how I expect things to unfold:

> in the first quarter the pace of change in real retail sales will slow down:

> this will accompany an intermediate term correction in the stock market:

My best guess is that this IT correction will begin around 1270 SPX. A 10% fall will take the market to 1140, close to the support level obtained using the fibonacci retracement.

> Then, as the retail sales series starts climbing again, the employment situation will improve and the stock market will rally:

The pace of change in private payrolls will probably reach the higher levels usually attained during previous expansions.

The SPX will start a new average bull run of about 20%.

> During the year the small business sector will start recovering after a long adjustment:

The index has recently spiked up. Notice that this index is correlated with the economic conditions. A recovery in this part of the economy will help employment improve.

> The housing sector does not get worse. A bottom is signaled by the related magazine covers during 2010 (especially Time).

What can be said for sure about outlooks one year ahead is that they will be off. However, this outlook represents a framework that is indispensable in trading. The outlook is subject to change as the picture becomes clearer. It is very important to be flexible and not to get married to it.

Here are some developments that may alter my expectations:

> the stock market shows very bad breadth during the intermediate term correction, suggesting the bull is over;

> the current bull leg does not stop until close to 1320 before it corrects. This would change the target for the correction to around 1180 but would not significantly alter the 1400 target on the upside;

> the economy shows signs of weakness, with the retail sales and employment series not acting as expected. The GDP reports show the consumer is not taking over any more;

> the problems in Europe become worse.

I will monitor the related indicators and adjust accordingly.