Three Reasons to Buy Stocks in 2011

Despite bearish and neutral reports from the financial media, you should expect the market to move higher to begin the new year. In fact, 2011 could very well be the best year for stocks in recent memory, according to several important sentiment indicators.

Don’t get me wrong — 2010 was a great year for the stock market. Stocks finally reached levels not seen since before the 2008 financial crisis, and it was the second straight year the market had posted gains.

Now, it appears that the market’s steady climb from its 2009 lows could be the beginning of a much bigger move higher.

The bears have expressed concern that soggy unemployment numbers and a decimated real estate market will kill any chances of an extended stock market run. These, and other concerns regarding QE2 and a weak Eurozone, are all valid.

However, I believe the bears are overlooking several strong indicators that show a market that’s not only recovering, but heading higher this year.

Look no further than these three important events from the end of 2010 for confirmation:

* The gap between bonds and stocks is rapidly growing. As StockCharts.com accurately reports

, stock and bond investments have been moving in opposite directions since August. The separation increased in December, showing us that investor’s risk appetite is growing. Investors are pulling money out of bonds and mutual funds, as they again begin to see stocks a more viable option to grow their money.

* Earnings are strong, and stocks remain cheap. Corporate earnings have risen 20% since the beginning of September, yet many stocks remain “cheap” relative to commonly used metrics. According to the Associate Press, The price-to-earnings ratio for S&P 500 index stocks was less than 16 late last month, compared to the 20-year average of 23. Also, many recognizable, name-brand stocks such as Apple and Netflix posted spectacular earnings and returns in 2010. This helps convince the average market watcher that it’s safe to go back to stocks.

* The Dow Theory Flashes the “buy” signal. In November, The Dow Industrials and the Dow Transportation indexes rocketed to 2010 highs. After consolidating later that month, a December rally pushed both indexes back to new highs. The industrials and transportation indexes tell a simple story: companies are producing goods, and these goods are being shipped. It’s a key component in the Dow Theory that points to a healthy rally. Expect sentiment to grow increasingly bullish if both of these indexes hold their respective gains and move higher.

Right now, the market is telling us that stocks will provide the best returns in the near-term. Carefully selected stocks — especially small-caps — should handily beat out other investments during the first fiscal quarter.

-Penny Sleuth-