Stock Market Fundamentals -- Indicators

Looking at 2010, most projections I have seen fall in a range of 1150
to 1350 for year's end. My SP 500 Market Tracker has the "500"
winding up next year somewhere between 1235 - 1300, depending
upon how strong recovering earnings may be. I do not a have major
issue with the Tracker projection as of now.

Core indicators -- monetary liquidity measures, market short rates,
confidence measures and the trend of lower quality investment
bond yields remain positive. So, I am still on a fundamental buy
signal. As the economy recovers, I doubt all the measures will
remain positive over the course of the year, so I look for a time
when the market will transition from an "easy money" buy signal
to a market more suitable for traders with time horizons that may
run out to a year.

My earnings indicators remain strongly positive as we move into
2010. The market tends to do well when earnings are accelerating
on a 12 month basis relative to the long run trend. Companies have
taken out enormous sums of cost, so earnings operating leverage
should remain strong, even if top line growth is moderate.

I am less confident about two key secondary indicators. One is
the oil price. The real oil price rose sharply over 2009, and petrol
prices rose accordingly. The impact of such on inflation was clearly
muted by a large decline in natural gas cost for heating, processing
and cooking. Pricing in the energy complex represents a key area
of uncertainty for the stock market in 2010. The other measure is
the degree of excess liquidity in the system. The economy is
expanding now and the broad measure of credit driven liquidity is
still in decline. Excess liquidity is winding down and could disappear
by spring 2010 unless private sector credit begins growing again.
The stock market rarely progresses strongly for long without a
liquidity tailwind, as the real economy normally outbids the market
for liquidity. We saw a situation like this in 2004 when real growth
outpaced liquidity in the early phase of expansion. Situations of this
sort are far more common in the latter stages of economic expansion
when inflation pressures arise and the Fed starts trimming credit.