Two weeks ago, we looked at the market’s strength as the S&P 500 index had its second down day (Tuesday 5/12) after what proved in hindsight to be at least a short term exhaustion top. Media hype over that run-up from the March lows was getting pretty loud. We looked at the math of bounces and some retracement lines to add some perspective.

Today (late Tuesday night 5/26), we find ourselves within one S&P 500 point of that close two Tuesdays ago! We’ve traded down, up, down and then back up today, all with a 45 point S&P 500 range. But tellingly, we haven’t made a new high since May 8th.

Once again, I feel obligated to state that the move off of the March 6th lows has been impressive. But to paraphrase someone’s quote I can’t find using Google, “Give me 1.7 trillion dollars, and I could throw a whale of a party, too.”

I’m not convinced that this leg up is over, but I don’t think that there is much cause for rejoicing. Last week we saw that the S&P 500 had not even retraced 25% of its down move from October 2007. To throw even more water on the flames that so many pundits are trying to fan, let’s look at how the S&P has fared versus good old fashioned gold.

Ouch! That’s some ugly perspective for us to chew on: 29 years of stocks versus gold. Yes, gold has gone up in price since the market was soaring in the Internet bubble. But the retracement we witnessed over the past couple of months is barely a blip on the radar screen…

Last week I mentioned that there were five significant rallies in the Dow during the Depression’s bear market. The folks over at chartoftheday.com have put those rallies in a nifty graph showing percent rally drawn versus rally duration. They have conveniently added the current bear market rally to compare and contrast.

This chart shows the magnitude of rallies that can occur with rallies lasting almost half a year and bouncing up almost 50%. Fast six week rallies carried us up 35% back when things economic were very bleak indeed. The fact that we’ve rallied neither as far nor as fast may be disconcerting, but it also gives hope that the rally isn’t over. I’ll be looking for whether we can eclipse that May 8th high with any conviction in the next couple of weeks. If so, we could sustain this leg up for quite some time. If not, the rally is likely to die under the weight of the gaudy expectations that have been heaped upon its still unproven shoulders.

Great Trading!
D. R.