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Bear Market Rally -- or Something More?

By Mark Arbeter Since the recent market low on Sept. 21, stocks have rebounded sharply and have quickly recovered most of their losses suffered after trading resumed on Sept. 17. While the market has had plenty of strong rallies that have failed since peaking in early 2000, the current strength has been impressive in light of the extreme uncertainty that exists today.

While it is certainly way too early to call for a powerful, long-lasting rally, many ingredients are now present to suggest that the surprises will come on the upside and not the downside.

During the decline to a major low, market sentiment must turn very bearish. Internal market measurements usually become extremely weak. Prices will usually fall very fast in heavy volume. As we have talked about the last couple of weeks, this has all occurred. When the market turns, the underpinnings of a powerful advance include a sharp price recovery on heavy volume, strong internal market readings, the ability to move higher in the face of terrible news, weak openings and strong closings, and many doubts that the rally is for real. These have all been witnessed recently to some degree.

We are in the midst of a strong rally that has been accompanied by very heavy volume. Secondly, some market internals have been extremely strong since the market took off. The NYSE and the Nasdaq have posted two days of up/down volume of over 5:1 and the 10-day up/down volume measures have moved up to 2:1 for the first time since the beginning of the last strong advance that started in the Spring. The NYSE 10-day advance/decline ratio hit 1.71 on Thursday, Oct. 4, the highest reading since the beginning of the powerful rally out of the October, 1998 lows. Similar 10-day breadth readings occurred in May, 1997, August, 1996, January, 1991 and December, 1991. All but one (12/91) represented the beginning of an intermediate term advance. A similar measurement of internal strength, the NYSE 10-day advances/issues traded, rose to 0.55 on Oct. 4, the highest since October, 1998 and August and October of 1982.

During the initial rally after a bear market, there should be considerable doubts about the market. So far, it seems that many believe this is nothing more than another bear market rally. This is far different than other recent rallies where sentiment turned bullish very quickly in the incorrect belief that the worst was over. Early on Friday, Oct. 5, when the market was moving lower, put/call ratios quickly shot up again back towards the 1.00 level, suggesting that option players believed that the market was going to roll over again. Also on Friday, the market was weak early on but finished the day strong. This is usually a pattern during the early stages of an advance.

The real test for the market will come at much higher levels. As we have stated, the initial advance after a sharp decline is usually very swift. This is because there was little resistance or buying done as the market fell.

The first minor test for the market will come when it starts running into chart resistance in the 1,100 area for the S&P 500, and 1,700 for the Nasdaq. Heavy chart resistance begins at 1,200 for the "500" and 1,925 for the Nasdaq. However, it is a bit too early to talk about getting back to those levels in the near-term.

We see further upside near-term as the market retraces its losses from the week of Sept. 21. Once these easy gains are behind us, we will see if this is just another bear market rally or something more. So far, it is looking like something more. Arbeter is chief technical analyst for Standard & Poor's

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