The Markets This Week

WHAT 2010 NEEDS IS A CORRECTION.

Stocks staged a colossal comeback in 2009, but as the ball dropped on a wet, snowy Times Square Thursday night, the outsized gains were matched by a sense of unease. The S&P 500’s 23% rally delivered its best annual gain since 2003, but the 65% levitation since March without any setback worse than 7% feels a little unreal, undependable, uncomfortable. Four of every five stocks are now above their 50-day moving averages. A correction will appease increasingly unrequited — and increasingly loud — bears, moving the mood meter closer to neutral.

A rejuvenating pause might not come quickly, even though stocks did end the year’s final session down. The market’s advance has been robust lately, and the fourth quarter’s rally was propelled by a phalanx of companies and every sector except, notably, financials. Even as uneasy traders booked profits on New Year’s Eve, the crop of stocks plumbing fresh lows barely made it to double-digits, while those busting new highs hit 285. The Nigerian on a Northwest flight who failed to detonate a bomb in his underwear sparked a rally in security screening stocks. Makers of body scanners like OSI Systems (ticker: OSIS) jumped 24%, while American Science & Engineering (ASEI) rose 6%.

The trickle of data also did little to disturb the notion of economic recovery. Slippage in home prices slowed, consumer confidence repaired to a three-month high, and weekly jobless claims shrank to the lowest level since July 2008. Economists ratcheting up their forecasts now expect the government to report Friday that no jobs were cut in December, and stocks’ reaction will offer an early gauge of investors’ appetite after the 2009 feast.

Quite worryingly, the huddle of bearish newsletter writers has shrunk to its smallest since April 1987, and fund managers are increasingly sanguine. But the public is still wary of stocks after a decade with one credit crisis, two recessions and assorted burst bubbles. The $3.9 trillion they stashed in money funds early last year has shriveled to $3.3 trillion, but that money didn’t go to stocks; investors funneled more than $380 billion in 2009 into bond funds even as they siphoned $35 billion from U.S. stock funds. The withdrawals haven’t let up, despite the rally.

The Dow ended 2009 up 1652 points to 10,428, and the 18.8% annual gain was its best since 2003. Three of its four top gainers were tech outfits, including Microsoft (MSFT), International Business Machines (IBM) and Cisco Systems (CSCO), although American Express’ (AXP) 118% rebound made it the top blue-chip by far. The Dow pulled back 0.9% last week, but still ended the fourth quarter up 7.4% — its third consecutive quarterly gain.

Here’s a breakdown of how its 500 stocks did in 2009. The 50 best performers from 2008 gained just 9% last year, but the 50 worst doubled. The 50 biggest stocks in the benchmark rallied just 22%, while the 50 smallest shimmied up 113%. Steady eddies paying the richest dividends were shunned, rising just 36.5%, while the yield-free climbed 72%. The most heavily shorted stocks jumped 60%, three times that of the least shorted. Companies with the most foreign revenue rallied 71% as the dollar weakened, while those with the least rose 28%.

Meanwhile, crude rallied 78% to top $79 a barrel. And with the government printing money to revive the economy, gold hit record highs no fewer than 27 times in 2009. It closed up for the fifth straight quarter — and the ninth consecutive year.
The Nasdaq Composite has rallied in nine of the past 10 months, and its 43.9% rise in 2009 was its fourth-biggest annual gain ever. Yet despite bouncing a whopping 79% off its March low, the tech benchmark is still 55% off its dot-com era peak of 5049, reached when the decade began (Source: Barrons Online).