Stocks begin the New Year where they left off in 2010 – Up!

Stock indexes rang in the new year with gains across the board. The 3 major indices all posted respectable gains today while reaching multi-year highs. The Dow closed up approximately 93 points, the S&P 500 up 14 points and the Nasdaq posted a gain of +38 points. However, the highlight of the day was the small caps, which notched the highest percentage gain of 1.98% in the S&P Small Cap 600 . In fact, the small caps also led the way last year with gains of over 20% outpacing their maturer brethren.

My goodness! This sounds like a broken record: markets up, gold up, fresh 52 week highs, etc. This bullishness has me a bit concerned here in the short term. Certainly, stocks can remain overbought or for that matter, oversold for extended periods of time. One of the metrics I refer to is the VIX index which acts as a fear gauge. The VIX index is almost at 52 week lows which means that investor sentiment is exceptionally high. The lack of investor fear and complacency could be a catalyst for the market to correct. The last time the VIX index was this low was in April/May 2010 right before we saw a 10% correction in the markets. Now I am not suggesting that this will occur again, however, historically speaking when the fear gauge hangs around these low levels, the markets tend to experience a pullback.

Having said this, if a pullback does indeed occur, this would be very healthy for the market which essentially has gone up in a straight line over the past few months.

Have a very prosperous week.