Our memory of the recent rally was on kicked-off by a bogus memo from Citigroup CEO Vikram Pandit about profitability, followed by a load of baloney from stress test regulators about banks’ health.

“People also are beginning to question whether the economic fundamentals are strong enough to justify continued gains,” continues the WSJ. This has got to be one of the most naïve sentences ever written. The 40% rise in stocks since early March never had anything to do with a 40% increase in economic fundamentals. The economy is collapsing (albeit at a slightly slower pace than before).

Stocks rose because the same “irrational exuberance” that got us into trouble in the first place caused investors to ignore economic fundamentals and pile into equities on the basis that the government wouldn’t let any more failed companies go bust. At no point during this rally did economic fundamentals improve. Economic news was simply less bad than before.

The following three indicators should make it patently clear to investors that stocks are in trouble.

1. There has been a consistent drop in trading volume going back to April. Average daily volume for all NYSE stocks hit a record of 7.21 billion shares in March (much of which was thanks to program trading by Goldman Sachs on the bank’s principle account). That fell to 6.42 billion in April… and 5.14 billion in May. This is below the average of 6.15 billion shares traded a day in 2009. In a true bull market, trading volumes tend to rise as more and more investors pour into stocks.

2. New stock issuance hit a record in May. This has dramatically increased supply at the same time that demand (as measured by trading volume) is falling off.

3. Senior corporate officers are net sellers, not buyers. This inside selling is inconsistent with a real bull run.

Here at Notes we have repeatedly stated that there has been money to be made in the recent upswing but that investors better be nimble to avoid the inevitable bull trap. We repeat this warning again today. If you are investing in equities, keep a close eye on events. Right now, you’re money is sitting in dangerous quicksand.

The beginning of the end for the stock market rally is finally here, says Payout Trader editor and technical analyst Charles Delvalle. Charles has been predicting a sell-off for quite some time. Here’s what he has to say on the subject:

After staying above the 20-day moving average since March 12, the Dow finally broke under it on June 16. Four days later, the Dow is trying desperately to stay above its 50-day moving average.

This signals an end to the shocking display of strength the market has shown in recent months.

Typically market bottoms are not V-shaped. They are usually W-shaped or form a reverse head-and-shoulders pattern. For example, after the last bear market the Dow formed a reverse head-and-shoulders pattern before signaling the start of the following multi-year bull run.

Let’s be clear. The “green shoots” hysteria in the mainstream media was designed to boost consumer and investor optimism and to send stocks higher. (Remember, the mainstream media needs large corporations – their advertisers – to succeed as much as Washington does.) The “green shoots” rarely indicated that the economy was improving. More often than not, they simply signaled that things were getting worse more slowly.

For readers taken in by the “green shoots” meme, it may surprise you that the Fed’s recent Flow of Funds report – which tracks the country’s financial flows – shows that credit conditions actually got worse in the first quarter of 2009.

As underground investor Dr Martin Weiss points out, “This directly contradicts Washington’s thesis that the government’s TARP program and the Fed’s massive rescue efforts began to have an impact early in the year.”

Weiss, of MoneyAndMarkets.com, says, “ The credit market shutdown actually gained tremendous momentum in the first quarter. And although it’s natural to expect some temporary stabilization from the government’s massive interventions, the first quarter was SO bad, it’s impossible for me to imagine any scenario in which the crisis could be declared ‘over.’”

Here are the facts Weiss has compiled about credit conditions in Q1 2009:

1. We witnessed one of the biggest collapses of all time in “open market paper” – mostly short-term credit provided to finance mortgages, auto loans, and other businesses. Instead of growing as it had in almost every prior quarter in history, it collapsed at the annual rate of $662.5 billion.

2. Bank lending went into the toilet. Even in the fourth quarter, when the meltdown struck, banks were still growing their loan portfolios at an annual pace of $839.7 billion. But in the first quarter, they did far more than just cut back on new lending. They actually took in loan repayments (or called in existing loans at a much faster pace than they extended new ones! They literally pulled out of the credit markets at the astonishing pace of $856.4 billion per year, their biggest cutback of all time.

3. Meanwhile, nonbank lenders pulled out at the annual rate of $468 billion, also the worst on record.

4. Mortgage lenders  pulled out for a third straight month. (Their worst on record was in the prior quarter.)

5. And consumers  were shoved out of the market for credit at the annual pace of $90.7 billion, the worst on record.

6. The ONLY major player still borrowing money in big amounts was the United States Treasury Department , sopping up $1,442.8 billion of the credit available – and leaving LESS than nothing for the private sector as a whole.

This is all very bad news indeed for the economy. And if it’s been reported in the mainstream media, we have yet to see it.