Stock Markets Hit Highs; is Pullback Coming?

COMMENTARY | The stock markets extended their gains over the past week with the Dow closing up 1.2 percent on Friday at a four-year high. The Nasdaq closed up 1.6 percent to finish at an 11-year high. While these gains are definitely something for investors to be pleased about, it seems that a pullback is on the horizon. The recent week's gains in the Dow were spurred on by a surprisingly strong job report. The tech driven Nasdaq was up a bit more due to the anticipation of the forthcoming Facebook IPO.

News that the U.S. added 243,000 jobs in January is fantastic news for the economy, but alone it shouldn't be enough to put the markets at this high a level. Investor confidence is at a recent high, but not necessarily so. The economy is on the comeback, but it is not yet at the pre-2008 level. The near record high of the Nasdaq is clearly indicative of another potential dotcom bubble that could burst if the Facebook IPO doesn't perform up to expectations. A lot is riding on Facebook and analysts are varied as to its projected level of success.

A more accurate measure of the economy is the housing market, which is still down. The housing market takes a longer period of time to adjust, but is typically more a more precise measurement of the true state of the economy. New housing construction is still down, but the secondary market is making a return in primary and in some secondary areas. While percentage of renters is still high, the movement of the housing market in a positive direction is a good sign.

The stock market is not going to stay at these current highs. A pullback is coming as investors will look to take profits and wait for the market to adjust to more favorable conditions. The smart investor is the one who recognizes that nothing is certain and the good times won't always continue to roll. Despite the improvement of the economy, the US isn't back to its pre-recession levels. The markets will drop; it is how the investors react that will truly determine the state of the economy.