U.S. stocks just capped off their strongest two-week performance since 1938. The Standard & Poor’s 500 Index is surging toward its third straight week of gains, something it’s done only three times since the bear market in U.S. stocks started 78 weeks ago.

And the Nasdaq Composite Index has erased its year-to-date losses and is now is up for the year.

The path of least resistance is now higher,” Miller Tabak & Co. LLC equity strategist Peter Bookvar told MarketWatch.com, citing such factors as not-as-bad-as-feared economic reports, optimism over Obama administration economic fix-it plans, and a recent jump in commodity prices that “has done wonders for some of the emerging markets that depend on them, whether it was Russia or Brazil.”

As Money Morning has continued to report, U.S. stocks are smoking hot. But the question remains: Will they stay that way?

With an index, the S&P 500, that closed yesterday (Wednesday) at 832.86, most market bulls see an index that’s gained 167 points from its intra-day, bear-market low of 666, meaning it’s zoomed 25% in just three weeks. It also means that the closely watched U.S stock index is now only 13% below its intra-day high for the year of 943.85 – a mark set Jan. 6.

The journey from that low to that high would represent a move of 42%, but there are some experts – including Ed Yardeni, president of Yardeni Research, who believe that can happen.  And why not? After all, we’re watching the best monthly market gain since 1987.
“I wouldn’t be surprised to see this rally take the S&P [500 Index] up to 1,000,” Tom Wirth, senior investment officer at Chemung Canal Trust Co., which manages $1.5 billion in Elmira, NY, Bloomberg News. “It’s been one data point after another that’s come in better than expected.”

But the bears aren’t hibernating: Once you claw away the apparent good news, you’ll find some troubling numbers, they say. For instance, this is the fifth time the market has spiked more than 10% since peaking in 2007, and two of those spikes shot up more than than 21%. They also note that the S&P 500 Index is still down 8.0% this year after sinking 38% last year – the worst annual return since the Great Depression.

“We’re in a situation now where the market is a little ahead of itself, considering how murky the fundamentals still are,” Chris Johnson, chief executive of trading and analysis firm Johnson Research Group, told The Wall Street Journal.

Pointing to the financial sector, which has been the rally’s chief catalyst, Johnson said: “It’s like a kid in school who went from getting an ‘F’ in class to a ‘D.’ People are happy, but only to a certain extent.”

There’s also the possibility that analysts, at this point, simply aren’t sure what to believe.

“Welcome to the club. Many investment managers are (paralyzed) too,” writes MarketWatch’s Mark Hulbert. “That’s because, on the one hand, they’re scared of the bear market continuing, making fools of those who flash  ‘Buy’ signals now …Yet, on the other hand, these advisers are afraid of missing out on a new bull market, if indeed one has begun.”

The question is: Where does that leave the typical investor?

The opinion emanating from the U.S. Federal Reserve is that the U.S. economy will turn around by the end of this year or the start of 2010. And the majority of both bulls and bears agree that the stock market – typically a “leading” economic indicator – will rebound before the economy does.

But before you make up your mind as to whether or not you want to join in on this rally there are several factors you should consider.

Easy-to-Read Market Indicators

• Blue-chip earnings reports: Stock indices won’t begin to rebound in earnest until earnings expectations improve for the companies they list. When our financial fiasco started, companies were comparing their falling earnings to results the prior year, when business was markedly better. This was one of the factors that induced investors to sell their stocks, exacerbating a decline that was already under way. With the first quarter of the New Year coming to a close, and companies in most industries closing their books and getting ready to report their first-quarter earnings, two factors will be working in their favor: First, they will be reporting against the much-lower profit reports of last year, making improvements easier; and second, earnings expectations going forward are much lower, meaning that there’s a much-greater potential for stock-market-boosting upside earnings surprises. If expectations are met or exceeded, traders can see the company’s low stock price as a deal and buy.

• Advance/Decline Line (A/D line): The A/D line is one of the most popular tools for measuring the breadth of a market advance or decline – in other words, gauging its overall strength or weakness. For instance, when more stocks move up than move down, the A/D Line moves up, as well. It’s also useful to look for divergences between a major market index, such as the Dow Jones Industrial Average, and the A/D line, as a way of determining whether a market is really in a rising or falling trend. For instance, there’s an old Wall Street adage that holds that “trouble looms when the generals lead and the troops refuse to follow” – meaning that if the Dow advances and is making new highs, but the A/D fails to do so, expect the market’s apparent charge to fall apart. Yesterday, 441 S&P stocks advanced, 57 declined and two remain unchanged.

• Volatility Index (VIX): Fear and greed are the primary emotions that drive the market. And the Chicago Board Options Exchange Volatility Index indicates the direction of the market by tracking the price of options for S&P 500 stocks – investments driven by fear and greed. When the VIX is low, option traders believe that the market will rise and get greedy with their bets. When the VIX is high, they are worried the market is going to tumble.

Green, Yellow or Red Light?

No matter how you interpret the indicators above, it’s best not to view the current rally as a green light or red light, but instead as a flashing yellow. Slow down, approach with caution, and be cognizant of everything coming at you from every other direction.

Applying that to your money and investments means cherry picking from both sides of the aisle in order to form a plan.

If you are looking for long-term gains, the bulls are more in the right than the bears. Every market downturn has rebounded. So the fact that the S&P 500 is more than 47% off its high is more of a reassuring statistic than a disconcerting one.

If you are trying to avoid short-term losses, the bears are more in the right than the bulls. This may be the most promising stock rally since the global financial world collapsed, but with unemployment high and suppressed consumer spending keeping the U.S. gross domestic product (GDP) in the red, it could also be the biggest “head-fake” rally in a continued bear market.

“Despite the fact many investors feel like they missed the boat to get in, it’s still not time to be cavalier,” says Money MorningInvestment Director Keith Fitz-Gerald.

But it’s also not the time to stand completely on the sidelines, either.

Should a bear market continue, there are still plenty of conservative investments out there – from those that pay hefty dividends to gold – that offer better potential returns than an antique Ball (BLL) Mason canning jar hidden in the bottom of your sock drawer.

“In a market as unpredictable as this one … I am less concerned with short-term rallies than I am with long-term investing success,” said Fitz-Gerald. “That’s why – if you’re thinking about getting in right now – I urge you to first carefully review both sides of the argument.”

Source: Financial Crisis Investing: How to Profit Even if the Current Bull Market Rally is Really a Bear Market Fake

[This is the seventh installment of a new series that will explore ways for investors to recover from the U.S. financial crisis. To reach an archive of previous stories in the series, please just click on the series logo.]

A tentative rebound in global stocks spluttered on Wednesday while euro zone government bond yields hit a three-year low as gloomy economic news highlighted the case for more aggressive interest rate cuts in Europe this week.

The euro stayed on the backfoot and oil held near a 3-1/2 year low a day before the European Central Bank, Bank of England and Sweden’s Riksbank are all widely expected to cut borrowing costs.

Supporting those expectations, economic reports on Wednesday showed the euro zone’s services economy fell deeper into recession in November than initially thought and inflationary pressures eased.

“This is a horrible survey across the board, showing that the euro zone service sector is being hit ever harder by the financial crisis, muted consumer spending and markedly weaker activity in key export markets,” said Howard Archer, economist at IHS Global Insight.

Australia’s economy grew at its slowest pace in eight years in the third quarter as gathering recession abroad and evaporating equity wealth at home curbed spending by consumers and businesses.

Central banks worldwide are cutting rates to fight recession. They are also considering more measures to stabilise financial markets and restore battered consumer and investor confidence, including help for struggling U.S. auto makers.

The FTSEurofirst 300 index of top European shares fell 1.5 percent in early trade with Britain’s FTSE 100 index down 0.9 percent and Germany’s DAX  shedding 1.7 percent.

MSCI world equity index eased 0.4 percent.

“The markets are still looking very tender,” said Justin Urquhart Stewart, investment director at Seven Investment Management.

“Markets are not focusing on any of the good news and the good news is rates are being cut, commodity pries are coming down, stimulus packages are being put together and banks are being supported. But the market’s feeling very depressed.”

Japan’s Nikkei managed to eke out a 1.8 percent gain following a rebound on Wall Street on Tuesday, but MSCI’s measure of other Asian stock markets put on just 0.2 percent.

EURO PRESSURED AS ECB CUT EYED

Also under pressure, the euro fell 0.7 percent against the dollar on the day to $1.2626 and was also weaker against the yen , while the dollar climbed 0.6 percent against a basket of major currencies.

But demand for less risky assets continued to mount, helping to push government bond yields lower.

The 10-year euro zone government bond yield plumbed a low of 3.004 percent — a level last seen in Sept. 2005, while the benchmark 10-year yield for U.S. Treasuries was at 2.727 percent, not far off a five-decade low of around 2.651 percent set on Monday.

“Economic indicators are plunging like there is no tomorrow and central banks are gearing up for significant easing,” said Elwin de Groot, a strategist at Rabobank, noting 100 basis point rate cuts from Australia and Thailand this week.

The ECB meets on Thursday and most economists expect an interest rate cut of 50 basis points, while the Bank of England is forecast to cut rates by an aggressive 100 basis points.

Sweden’s central bank is likely to slash rates by a record 100 basis points, or possibly more, on Thursday when it announces the result of its meeting, which it brought forward by almost two weeks.

Meanwhile, U.S. crude edged up 41 cents to $47.37 but was within striking distance of Tuesday’s trough of $46.82 — a low last seen in May 2005.

Gold slipped to $774.80 an ounce, down $6.70 from New York’s notional close on the back of a broadly firmer dollar.

By Ian Chua
LONDON, Dec 3 (Reuters)

The Journal points out that after “a reign that began in February 2002, the financial sector” is no longer #1 in the S&P 500 Index. Last week, banks, brokers and other financial shares in the blue-chip index slipped to a 16% weighting.

That puts financial shares in second place, just a shade behind the technology sector that now makes up 16.4% of the index.

That’s the first time in six years that the leadership has changed in America’s most widely followed stock index.

As the article points out, this change at the top isn’t due as much to strength in tech – as to the shellacking financial stocks took in the past 12-months.

The S&P financial sector index has plunged more than 30% – or US$814 billion in lost market value since June 1, 2007. That’s the biggest loser by far among any of the 10 major sectors.

There’s a cautionary tale here for investors who believe that big financial stocks like Citigroup will quickly rebound from sub-prime woes. The technology sector was far and away the biggest sector in the S&P 500 back in the 1990’s, but suffered a long and painful fall from grace.

Tech shares peaked at nearly 35% of the S&P 500 back in 2000 then fell victim to a violent bear market that saw tech shares lose nearly 80% of their market value in less than three years. Tech stocks made up less than 13% of the S&P 500 by October 2002.

Judging from the dramatic reversals of fortune suffered by tech shares in the recent past, financials may have a lot more room to decline in the years ahead.

And since they are well represented in popular indexes such as the S&P 500 and the Dow Jones Industrials, financial sector shares could be a major drag on overall stock market performance for quite some time. Stay tuned.

MIKE BURNICK, Senior Editor and Global Markets Analyst

Source: The First Shall Be Last