For holders of risk assets, things are going right. Stocks, commodities and high yield bonds all made new cycle highs last week. We remain bullish of risk assets both fundamentally and technically, for the reasons set out in our 2010 Outlook. However, we need to understand and plan for what could go wrong. One of our key assumptions is "the Fed will continue to err on the side of reigniting rather than risking a return of deflation and will not hesitate to extend its program of purchasing government debt beyond its scheduled termination in March if it deems necessary." Minutes released from the Fed's mid-December meeting revealed there is considerable debate about whether purchases of mortgage-backed securities should be extended. Inflation hawks are concerned about rising inflation expectations, the potential of inflating another asset bubble (like the 2003-2007 housing boom) and markets' growing dependence on monetary largess. Inflation doves warn that without government support the still fragile recovery is liable to fall back into recession thereby risking deflation, especially if mortgage rates spike and cause another downleg in home prices. That in turn would further weaken both consumer finances and the banking system.

David Fuller's view It is important, I suggest, to consider what could go wrong, while participating fully in the market trend which is currently unfolding. I have addressed this subject in Fullermoney, just before yearend and also last week. I will continue to address it, not least in the Audio, until something actually does go wrong.

Don't miss The Weekly View's item: "Japan - a cautionary tale: similarities and differences with the US". It is clear and concise, and accompanied by a compelling graph which should be forwarded to the Fed.

As mentioned in last night's Audio, many stock markets show a short-term overbought condition following the yearend and early January rally. You can see this in the persistent moves and also by using the stochastics indicator in the 'Charting' section (see upper-left above each individual chart in the Library).

This suggests susceptibility to a temporary pause and consolidation within the overall upward trends. I doubt that this phase will persist for long because most stock markets only recently completed a ranging corrective phase, including a largely horizontal gravitation towards the mean represented by rising 200-day moving averages. If I am wrong, stock markets will slide well back into those underlying trading ranges.

The JPMorgan Indian Investment Trust (JII LN) had a pullback today, partially recovered, which I believe reflects a small dilution following the subscription share issue which many of us took up.