Bear Market Rally Continues

Despite a mid-day market swoon and a dizzyingly high VIX, the market managed an impressive gain, coming only 2 days after a monstrous rally on Monday.  Many analysts point to competing news items -- good housing sales, deficit spending by the feds, early re-payment of the TARP, poor Treasury auction, etc,-- as the cause of the wild swings in price levels.

The fact is that the market has been long overdue and now we are up about 20% from the low set March 9th, just about the average for a counter-trend rally.  Problems remain with bank solvency, asset deflation, rising unemployment and decreasing consumer spending which appear to have no end in sight.  Is there more rally left in the market given all these headwinds, or should prudent investors be heading for the safety of cash?

Factors in favor of a continued rally are the large stores of cash on the sidelines and  the end of the quarter when fund managers need to report their positions and few will want to say they spent the best month since 1991 in cash.  Also, sentinment remains bullish with "wall of worry" permeating the trading sites.  Perhaps most immediately significant is the statistic that short-interest is at a one year high, which should act as a continued bid on the market.

My surmise is that a small pull-back may be in the offing, but we should make one more push for the 840 mark on the S&P before consolidating.  But make no mistake, we are still in a bear market however timid he may appear at the moment, so set those stops and stay disciplined.