Stocks show signs today of having more fuel in the tank

I wouldn’t get complacent about this rally but it passed some milestones yesterday and today (March 9) that argue it has some more room to run.

Here are the positive signs:

• In the final hour today volume picked up. That’s a huge positive because if a rally is to continue more investors have to participate as prices go higher. Falling volumes, which the market saw on Monday, indicate that investors are stepping aside as prices rise. Higher volume at this point in a rally—this move upwards dates from a low on February 8 at 1057 and as of the close today now totals 7.9%–usually means that some big institutions have decided that stock prices show enough upside momentum for a buy.

Yum, yum! Is risk tasty again?

What do these sectors—solar energy, wind, gold, Spain, Italy, steel, metals and mining, and retail—have in common?

They’re all among market leaders today. ETFs (exchange traded funds) in these sectors are outpacing the Standard & Poor’s 500 (up 0.5% as of 12:25 ET). Claymore/MAC Global Solar Energy (TAN) was up 4.7%.  First Trust Global Wind Energy (FAN) was up 3.1%. Market Vectors Gold Miners (GDX) was up 3%. iShares MSCI Spain (EWP) was up 2.7%. iShares MSCI Italy (EWI) was up 2.6%. Market Vectors Steel (SLX) was up 2.7%. SPDR S&P Metals and Mining (XME) was up 2.5%. And Retail HLDRS (RTH) was up 2.3%.

It sure looks like investors have recovered their appetite for risk—and maybe their belief in the global economic recovery.

Is it a bull? Is it a bear? A strategy for making the best of a market that’s both

So this is a cyclical bull market rally of potentially up to three to four years’ duration inside a secular bear market steady decline of potentially 10 to 20 years? That’s what I argued in my post of February 19 http://jubakpicks.com/2010/02/19/why-even-after-a-70-gain-this-is-still-a-secular-bear-market/

All right Sherlock, navigate that one for me and my portfolio.

The strategy is actually pretty simple. But the execution…

Well, it shouldn’t be too hard for anyone who combines the self-confidence and iron nerves under pressure of a Stonewall Jackson, with the sensitivity to rhythm and emotion of a Martha Argerich with the psychic powers of the three witches in Macbeth. (While I’m wishing can I have a flying horse and a dragon too, please?)

For the rest of us executing a strategy that can navigate a relatively short-term bull and a relatively long term bar might be a bit of a challenge.

A challenge. But not impossible. Let me start off by laying out the nature of such a strategy so that the challenge becomes clearer.

In my post of last Friday, I argued that we were still in a secular bear market—one that began in Mach 2000—and that could still have as much as another ten years to run even though we are currently in one of the great cyclical bull markets of all time. How else would you describe a rally that produced a 70% gain from the March 2009 low to the January 2010 high?

But I don’t want to rehash that argument here. In that post I promised that today I’d take my best shot at telling you how to navigate this bullish bear (or is that bearish bull?)

Why even after a 70% gain this is still a secular bear market

This is still a bear market

Even though stocks, measured by the Standard & Poor’s 500 Stock Index, were up 70% from their March 9, 2009 low to their recent high on January 19, 2010.

Yep. Yes indeed. Absolutely.

If by bear market you’re talking about what’s called a secular bear market.

 Strong market rallies—even three to four year cyclical bull markets—can take place inside a longer bear market trend. And despite the bull rally the long-term trend can remain pointing very strongly downward.

I think that’s exactly where we are now:  in the midst of a strong cyclical bull rally that’s taking place in a long-term bear market down trend that began in March 2000 and could have another five to 10 years to run.

I raise this question and answer it this way not to scare you out of the market. Remember that even if this is just a cyclical bull market rally inside a larger downtrend such a rally can go on for as long as three or four years. (Although a cyclical bull is by no means guaranteed to go on for that long.) I don’t want you to jump ship just yet.

But I think understanding that we’re in a cyclical bull market rally inside a longer-term secular bear market is the best way to explain why this stock market feels the way it does, why so many investors still doubt this rally even after a 70% gain, and why it has been so hard to go along for the ride.

So is the correction over already?

So that’s all ya got?

If the much feared correction is over, then investors are still waiting for the kind of 10% correction that normally punctuates a rally.

From the January 19 peak close at 1150.23 to what is so far the bottom at 1056.74 at the close on February 8, the Standard & Poor’s 500 Stock Index was down just 8.13%.

And as of 1 p.m. ET on February 17 the index is up 4% from the February 8 close.

Looking at the action at the end of January and into early February I thought that there was a good chance that the rally would finally suffer a 10% correction. And I thought that, if that happened, it would be a good thing. Rallies need to have corrections to wring out excessive enthusiasm and to bring in new money from the sidelines as investors go bargain hunting. My January 28 post http://jubakpicks.com/2010/01/28/odds-that-this-is-a-10-correction-and-not-just-5-rise-as-tech-stocks-sink/ will give you more details on why I thought we were headed for a 10% correction this time and why that might be a good thing.

Now there’s some chance that the rallies of the last few days are related to an absence of news from China because of the week-long New Year holiday that began on February 15.