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February Market Review and Outlook February 7th, 2011 By Kim Mailey, CFP

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About 100 years ago, the Russian physiologist Ivan Pavlov noticed that when the feeding bell was rung, his dogs would salivate before they saw the actual food. They had been "conditioned." And so it was with "The Great Stimulus" of 2008-09. The market's players salivated long before they could see actual results and the market roared up.

2011 is Year 3 of the Presidential Cycle which historically is a very good year in the markets. The last time the broad US market (as measured by the S&P500 Index) had a negative year in the 3rd year of the Presidential cycle was in 1939.

S&P 500 - The Third Year of the Presidential Cycle
(Data courtesy of MetaStock)

The average of the 20 observations above is an annual gain of 14.53%. In 2011, we have the added stimulant of "QE2" - the second round of the US government's quantitative easing. Despite this consistent observation, the past does not predict the future. Having said this, moral hazard was seen to be alive and well in January, and the dogs were raring to go! The market came out of its starting gate like a greyhound, with the S&P 500 posting a 2.23% return in January. The well-trained market dogs have so far been salivating on cue and behaving exactly as they were expected to in January.

While it's true over the long term that market performance is all about earnings, in the short to intermediate term the stock market is heavily swayed by fear, hope and greed only loosely connected to the business cycle. This Fear, Hope and Greed cycle can be seen in this chart.

Beginning at the lower left of the chart we have Optimism with the chart rising to Excitement, Thrill and Euphoria where the bullish psychological environment peaks and turns down. You can liken this ascending pattern to what occurred following the Long Term Capital Management, and Russian default, back in 1998. Said debacles pressured the SPX from its July 1998 high of 1167 into its Despondency low of 957 in October of that year. At those lows, Fear reigned supreme. From there, however, stocks bottomed and traveled higher into their late 2000 highs, accompanied by the aforementioned ascent into the Euphoria region. Subsequently, stocks peaked and turned down. Over the next two years the SPX would shed some 49% of its value causing investors' mindsets to travel down the other side of our psychological chart (Anxiety, Denial, Fear, Depression, Panic Capitulation, and Despondency) with the S&P 500 bottoming in October 2002. At that point investors were generally despondent with some liquidating their stock portfolios just in time for stocks to bottom and begin a rally that would again cause investors' psyches to rise into the stock market's October 2007 peak.

I revisit the Fear, Hope and Greed cycle not because I think we are approaching the Euphoric zone, but because I continue to believe we are near the Optimism level. While a pullback during 2011 of 3% - 10% could play out, any pullback is probably a buying opportunity.

With a generally positive view on the markets for 2011, let's provide a brief look back at specific stock recommendations I have made in my commentaries in the past two years.

Date Reco'd	Security	Price When Reco'd	Price Feb 7 '11	Price Change (excluding dividends)
Feb 3 '09	Bank of Nova Scotia	$30	$58.88	+ 96%
	Bank of Montreal	$32	$59.29	+ 85%
	CIBC	$46	$78.26	+ 70%
	National Bank	$35	$71.67	+105%
	Royal Bank	$31	$54.74	+ 77%
	TD Bank	$39	$78.13	+100%
	Russell Monthly Income	$54	$70.85	+ 31%
Sept 7 '10	Crescent Point Energy	$37.75	$43.75	+ 16%
	Fortis	$28.80	$35.07	+ 22%
	Husky Energy	$25.15	$27.44	+ 9%
	Rogers Communications	$35.87	$35.00	- 2%
	TransCanada Corp	$36.59	$38.24	+ 5%
	Thomson Reuters	$37.22	$41.25	+ 11%
Dec 3 '10	Barrick	$54.32	$47.24	- 13%
	Onex	$29.04	$34.64	+ 19%
	Rona	$13.35	$14.01	+ 5%

There will always be dark clouds brewing - some of the darkest currently are the unrest and instability in much of the Arab world. The underlying triggers in Tunisia and Egypt - weak employment prospects, stagnant incomes, rising prices and a lack of representation - are common in much of the region. While it is troubling to watch these clashes on television, it must not divert you from knowing that these countries are not major contributors to the recovering world economy. However, I wish them a speedy resolution to the violent outbreaks and the beginning of a long-term solution to gaining an education, prosperity and a democratic vote.

Finally, I mentioned in my last market commentary an attractive investment opportunity for retired or nearly retired investors seeking a conservative investment offering tax efficient monthly income and the potential for price appreciation over time. If we have not had the opportunity to discuss this with you, the offering is still available for about another week. Please call Brie or me.