Market Correction?

I am just as bearish as the next guy but there are three reasons why I believe the market will go higher this year. First, let me say I know banks are hoarding, foreclosures are going up, mortgage resets are still occurring and I have not seen job creation in months, so my argument is not that the market "should" go up, my argument is that the factors below outweigh the aforementioned factors.

1) There is waaay too much liquidity in the capital markets. Marginal and mediocre players are given the opportunity to raise capital, refinance and amend liabilities that would be disastrous in a tight market. Even if rates go from 0 to 2%, is the mutual fund manager going to buy cds or stay in equities? Until there are relatively better capital allocation vehicles, the market rise will continue.

2) The cash on the sidelines argument is more factual than I believed. According to Businessweek, there is $3.2 trillion dollars in money market funds. So, 24% of the US GDP is earning less than 50 basis points. Also, the same article stated $369 billion went into bond funds relative to $23.4 billion in equity fund. There is still room to run with that much money sitting on the sidelines. I do not have the numbers but also since the Treasury auctions have been performing well, the risk less trade seems to be in vogue with 3 month T-Bills yielding 15 basis points according to Bloomberg Market Data.

3) The third point is the strongest. There is still fear and pessimism in the market. I gauge markets by book publishing. There are too many books being published about the crash, bailouts, Wall Street hubris and associated topics. When the trend changes to booms, how to make millions in markets or day trade your way to a million then we will see optimism return. There is not blood in the streets and people are still fearful and not greedy.

Personally, I would be cautious even though my argument is caution is not necessary YET. However, I would not go short issues I feel are weak or marginally. The better strategy is to stay flexible and make money. There is no premium on cash right now, I cannot return to my investors and tell them I outperformed cds by 100 basis points when they could have done it themselves. The bull momentum is not as strong as mid 2009 but the bear forces are in retreat.