(SINGAPORE) Things are looking pretty solid in equities. Stock markets have posted a V-shape rebound, and some research houses even expect indices to hit fresh highs in the year ahead.

But analysts also see some major headwinds next year that could derail any recovery in stock markets.

In a report, David Rosenberg, chief market strategist at investment firm Gluskin Sheff, points out that although the Dow Jones Index has chalked up decent gains in US dollar terms, it has actually fallen off its peak on Aug 27, when measured in gold.

BT did a check on Bloomberg and found a similar story painted across other indices.

When priced in gold, the S&P 500 has lost more than 6 per cent from its peak on Aug 27, while the Nasdaq has dropped 3.5 per cent from its half-year high.

In Asia, the gold-denominated Hang Seng Index has fallen 12.5 per cent from its half-year peak on Aug 11, while the re-based Straits Times Index (STI) has dropped 6 per cent since August.

According to a hedge fund manager, these figures not only show that stock markets have underperformed gold but, more importantly, the rise in stock prices could simply be because there is more money in the system, rather than improved fundamentals.

'So the question is: did the stock markets really recover or not?' he said.

Indeed, a sign of softening demand is the sharp drop in daily traded volume here - an indication that retail investors are staying away.

Most recently, daily traded volume on the STI fell to as low as 147 million shares on Dec 23, from an average of 230 million shares in October, although the benchmark continued its upswing, driven by a handful of blue chips.

If Robert Farrell, former chief market strategist at Merrill Lynch, is right, this is a bearish indicator since 'markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names'.

Already in the US, investors have taken US$14 billion out of stock funds since Oct 21, according to The Wall Street Journal.

And many pension funds there are cutting back on stock holdings, leading some to conclude that market gains are being powered by fast-money investors such as hedge funds and proprietary trading desks of big brokerage firms.

But besides retail investors taking a break for the festive season, there could be a more fundamental factor at play here.

According to analysts, stocks punched to fresh peaks on hopes of a strong economic recovery next year.

But as 2010 approaches, there is a nagging fear whether the bullish expectations can be met.

'If they do not materialise, it could result in earnings disappointment and potential downside risks,' said Carmen Lee, head of OCBC Investment Research.

And the likelihood of that happening is rising, given that 'share prices have already priced in most of the positive news'.

'A look at the STI showed the index is up more than 90 per cent from this year's low, versus gains of 45 per cent to 108 per cent for the other US and regional indices, while earnings have definitely not doubled from the lows seen in March 2009,' she said.

What analysts are watching out for are possible headwinds next year including the pace and withdrawal of the economic stimulus packages and the impact of these exit strategies, possible higher interest rates and the pace of corporate earnings recovery.

'For the STI to advance further, upward movements will need to be supported by good earnings growth, and Q1 and Q2 2010 earnings will be watched closely for indications and guidance,' Ms Lee said.

'There is a good chance of the STI testing the 3,000 level, but beyond that, earnings growth will need to come in to support share price gains.'

Terence Wong, co-head of research at DMG Securities, concedes that market conditions are still fragile but says Asian corporations have generally seen a genuine pick-up in orders and 'consumer spending should recover in 2010.

'That is certainly a cause for optimism, especially in the stock markets.'

Some analysts track the Investors Intelligence poll, which now shows the bull camp at 52.2 per cent and the bear camp at a record low of 16.7 per cent.

That bear share is down to a multi-year low, while complacency appears to have taken hold in the market - the Volatility Index closed at 19.93 on Monday - a 49 per cent plunge since the start of the year.

For the contrarians - those who believe the crowd typically is too late - the rising optimism is a reason to bet that the stock rally is nearing its end.

However, most observers here doubt the market will face serious disruption, and some brokers are hopeful that a January rally will lure retail investors back.

Although DMG's Mr Wong agrees the indicators point to a possible short-term correction for equities, 'the prospects of a major downturn are fairly remote for now', he said.

'I would think that the slower momentum tells us that we are very late in the bull market, but that doesn't mean it is a bear market - at least not yet.'