Rally: We're At A Very Important Point

A number of trends are providing modest boost to stocks this morning: congressional legislation, a continuing modest dollar rally, commodities like oil and metals continuing to decline, and bonds down, earnings reaffirmations.

We are at a very important point in the rally, the point where bulls start questioning whether the bear market is over or not. Short-term it can be argued that we are overbought, certainly in financials. But overbought in a bear market is different than overbought in a bull market.

In a bull market, as Lowry has noted, overbought readings are considered a sign of strength. However, in a bear market overbought readings are clearly a signal to take profits.

So which is it? If the bear market is over, then these signs of strength are good. If the bear market continues, this is a classic bull trap that will end badly for those who have gotten in during the last week.

The bears can argue that while we did have strong volume and a reversal last week, we had no 90 percent upside days, i.e. days where the ratio of upside to downside volume exceeds 90 percent. This is the classic sign of a surge in investor demand and often looked for at market bottoms.

The lack of a 90 percent upside day is a problem for bulls.

Bulls argue that the selling climax in the XLF, the ETF that is the financials index, was sufficient for a bottom in financials.

The S&P is now sitting at the closing low levels for March (1277 or so).

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