Does the stock market have "legs"?

Today was another great day in the stock market, and stocks have been on a strong upward trend for the last 3-4 weeks. Some people think the worst is behind us, that the market has "legs", and if you're out of the stock market, it's time to jump back in.

But not so fast. Remember that in the long term, the level of the stock market is generally a function of earnings. Yes, sometimes euphoria takes over the market like it did in 1999-2000, but generally earnings will drive the stock market's direction. And I can tell you that we're going to have more disappointing earnings numbers in store for the first quarter of 2009.

One bright spot (perhaps the only bright spot?) is agriculture stocks. Monsanto came out with some decent earnings numbers even though the company is revising down its projected earnings for the year. So what's up with agriculture stocks these days? Well, unlike the unstable economy we are having right now, agriculture is quite stable since people always need to eat. The price of U.S. commodities have come down significantly since last summer, but they are still at reasonably robust levels which allows farmers to sell their goods at decent prices. Also, the weak U.S. dollar is boosting U.S. exports of agricultural goods because it makes our goods cheaper when viewed from the perspective of a foreign currency.

But aside from agriculture, there's a lot of pain out there. Unemployment continues to increase, banks are often refusing to lend, and bankruptcies (both personal and business) are reaching record highs. This impacts consumer spending which is really the lifeblood of the economy.

I believe the G20 summit and Geithner's plan for investors to buy toxic assets are giving the market more confidence, but the G20 summit is mostly for show and the purchase of toxic assets will only deal with a segment of the problems in the financial system. Like I said, there is probably more pain to come, so it's wise to stay relatively conservative with your investments at this time.