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Richard Russell, of the Dow Theory Letter, has been skeptical of the recent rally and believes the big test is coming in the next week or so:

The big question I puzzled about over the weekend — Are we in a bear market rally or a new bull market? Here are my answers —

(1) The market turned up in a V-shaped reversal off the March 9 low. However, almost all bull markets start with a period of accumulation. This entails a sideway move, sometimes taking weeks or even months. Or it may require a non-confirmation of the Averages as per December 1974. At the March low, we saw neither — no indication of accumulation. And that bothers me.

(2) At the March lows, we did not see the “great values” that usually accompany major bear market bottoms (i.e. P/E’s in the 5-8 area, average dividend yields of 5-6%).

(3) The market was severely oversold at the March lows, a condition that often sets off a “relief” (“let off the pressure”) rally. The advance was probably triggered by the severely oversold condition of the market.

(4) The one thing a money-manager cannot afford to do is be on the sidelines during “what could be” a major rally. Once the market started up from the March 9 low, many money managers leaped in. The big short positions were immediately squeezed. The rise became a momentum advance. Retail buyers moved in, many trying to retrieve some of their brutal losses.

(5) The rally moved up “too fast” — action more typical of a bear market rally than the slow, plodding rise that is characteristic of the advance in a new bull market.

(6) Two groups that led the rally were Financials and Consumer Cyclicals. Interestingly, these two groups contained respectively 5 billion and 2.7 billion shares sold short. This suggests strongly that a significant part of the rally was fired up by short-covering in these two groups (thanks Alan Abelson for this information).

(7) Many investors and analysts turned optimistic after the market had rallied for only a few weeks. At true bear market bottoms, investors remain stubbornly sceptical or bearish for months after the bottom. Remembering 1974, people were actually angry when I turned bullish at the bottom. I was receiving hate letters and subscription cancellations.

All of the above have kept me skeptical and cautious about this rally.

April 20 – A bad day but a significant day. This is the first real break in this bear market rally. Now this is important — if both averages can rally back above their April 17 closings, the rally will likely continue. But if only one average makes it above their April 17 closings, and the other fails to confirm, this bear market rally is probably over. The April 17 closing highs are Industrials– 8131.33 and Transports– 3094.87. So the key-test lies ahead– no sense guessing the outcome. Let the stock market tell the story. My own instinct, as it has been all along, is to stay out of this rally. If the recovery fails, and the averages break their March 9 lows– its “Katie, bar the door.”

Like the title of the new comedy movie, “I’ll observe and report.” Only this is not a comedy. There were a heavy 10 declines for every advance today — today was probably a 90% down-day, if so, it should be followed by 2-7 days of rally. The key now is how far any rally can carry.

I have to agree.  I don’t think this furious bull is going to roll over and die quite so easily.  I still expect this market to remain buoyant into the actual stress test results at which point we should run out of catalysts to generate sustainable future gains.