Just a few moments ago the United States major stock indices finished off the first quarter with some very nice gains. Over the three month period, all of the major indices were up strongly. In fact, the United States stock market outperformed the rest of the world, which is a big change from what had been the norm before this quarter.

The biggest winners were the smallest stocks. The Russell 2000 Index, which is a basket of small companies, went up an astounding 8.6% in the first quarter alone. The NASDAQ stock market gained 5.7%. The Dow Jones Industrials gained 4.0% for the quarter. The S&P 500, largely seen as the broadest measure of the market, gained about 4.9% on the quarter. The S&P 500  is now up about 11% from its February lows, so the comeback from the initial selloff has been strong.

Interestingly, the banking sector was one of the huge winners in the first quarter. The banking sector as a whole gained almost 22% over the first three months of 2010. Retailers were also big winners as retail sales and consumer spending numbers perked up better than most investors expected during the quarter.

It is important to remember that this was just one quarter, and the stock market can be very fickle. I tend to think the long-term prospects of the stock market are solid, but they rely very heavily on the employment situation improving fairly quickly. Housing numbers have also been disappointing, and concerns about interest rates could weigh on the market in the months to come. If you have followed the stock market much at all, you should know that there are always plenty of worries to go around. In the first quarter there were worries abound, but the market was able to overcome those and have a great quarter. Let’s hope it continues through the rest of the year and beyond!

Today the S&P 500 squeaked to the highest level in 17 months, finishing the day at 1150.24. The previous high was set on January 19th at 1150.23. In late January and early February the market slipped by more than eight percent as investor took profits and worries about Greece and the debt crisis took center stage. For a while it seemed that a new correction may have been starting, but at least for now it seems that was just a temporary bump in the road to the recovery.

Over the last few weeks I have heard a lot of complaints about the volume in the market being lighter than most people would wish. While I understand those concerns, I think the process the market has been going through is a very normal one. After a huge run last year many investors took to the sidelines in late January, but over the last few weeks the market seems to not want to go lower. A television commentator wisely called what has happened the last few weeks a “melt up of the market.” The market hasn’t been setting any records on speed of a gain, rather it has just slowly moved higher as investors digest the current news.

After a great run like the market had over the past several months I think it is a good step to see a period of market digestion, and it certainly is encouraging that during that time it seems that even negative news hasn’t been that much of a drag on the stock market. The slow churning of the market right now might be boring and difficult for some traders, but the truth is it is a very healthy process for the long run. So long as the market holds it own during the quiet period I think the  signs are positive for the next big move in the market.

Today the stock market is roaring higher as reports of a possible bailout of the debt-rattled Greek financial system spearheaded a wave of buying on Wall Street. Reports are that Germany is looking into helping out Greece by developing a rescue plan that will be aimed at rebuilding both the Greek system and the slumping Euro. Certainly the whole Euro zone is starting to feel some heat of late because of the huge drop in the Euro since December.

Increasingly of late there has been talk of a European debt crisis because of the terrible situation that Greece is in. It seems the whispers we are starting to hear are that other countries are starting to realize they can’t afford to have Greece in such a bad position and a European debt crisis is a very real possibility if action isn’t taken.

This affects the United States market and the overall global market because of the global economy in today’s world. The simple fact of the matter is there is no way that Europe could have a widespread debt crisis and it not hurt the American economy. The stock market in the United States has reacted very negatively of late to the news of the worsening situation in Greece, so today’s news is definitely a reprieve for the market.

While today’s rally is a nice one and it is news driven, the United States stock market will not be driven by this news in the long run. Rather it will be the productivity, or lack of it, from the American economy. It will be the employment picture, which is still rather cloudy right now. It will also be the consumer confidence and retail sales, which will indicate how the consumer is doing. Don’t get caught up in one day’s movement from a news event such as this one too much, because over time it will be the fundamentals of the economy that matter most.

So 2009 went down in the books as a very good year for the stock market as the S&P 500 gained more than 20%, but as almost anyone will tell you, Wall Street looks at the future and the past means very little. What will the stock market look to for direction in 2010? Can the stock market make it two winning years in a row?

2010 is shaping up to be a decisive year for both the stock market and the overall economy. 2008 started the deep recession and it continued into early 2009, but the end of 2009 brought high hopes that maybe the economy and the market had turned the corner. 2010 will be the year where we find whether things actually get better on the bottom line or if the recent gains were just because of false optimism.

What kind of things will be tracked most closely to determine whether the turnaround is real? First and foremost is the jobs market. The notion of a “jobless recovery” is silly to me, because I simply don’t believe we can have a real recovery without the jobs market firming up. In addition to this we will need consumers to feel more comfortable, but really I think consumer confidence and retail spending are quite closely tied to the job market and how confident consumers are about their situation or their job prospects. Since the consumer accounts for 70% of the GDP in America, we clearly need a healthy consumer.

The stock market outlook for 2010 is quite unclear and stock market predictions are all over the map. Some analysts are expecting a V shaped recovery and a continued huge run up in stocks, while others are looking for a return to the bottom that was hit in early 2009. In my opinion this year will be a year of digestion for the stock market. The market needs to digest last year’s big gains and figure out whether they were built on a solid foundation or not. Expect economic data to take on increased importance this year as investors look for signs of where to move their money next.