Is The Bear Market Over? - NOT

The stock market action of this week has been very encouraging. The Dow, Nasdaq, and S&P 500 were up 4.3%, 4.92% and 4.33% respectively. Google was up 19% on Friday. Earnings announcements by Caterpillar and Honeywell indicate that General Electric's miss may be the exception versus the rule.

Is the Bear Market over? I don't think so, yet. I am encouraged by the upward market trend of this week. However, I think it is likely a bear market rally, versus the end of the bear market. Here are my reasons:

Short covering probably contributed to the rally. There are still a lot of bearish traders shorting stocks. They were caught off guard by the upward move this week and probably needed to cover short positions to minimize losses. This has created short term additional buying volume, driving the market up, but not in a sustainable way.

There hasn't been capitulation. In 2002, I remember it was extremely painful to be invested in the stock market, so painful that I sold most of our investments by the end of the year. I haven't seen this level of dissatisfaction yet in 2008. In casual conversations today, people were unhappy with 8% losses in 401Ks, but are not yet turning away from stocks.

The impact of lower consumer spending still hasn't been fully reflected in the economy. I believe that reduced consumer spending is still trickling through the economy, which will result in more poor earnings results in the second quarter. While the stimulus rebates may mitigate the effect, I believe that the rebate payments won't eliminate the trickle down impact of reduced spending.

Nevertheless, I appreciate the rally and hope to take advantage of it. A bear market rally should allow me to sell my remaining positions which have a sell signal. During this rally, I will also take some profits in my managed accounts and maintain only a minimum target level of investment in stocks. For my own accounts, I may sell up to 1/2 of profitable holdings to hedge against market downturn. Thus, when the market declines again, our exposure will be reduced. However, if I am wrong and the market continues a bull advance, we will not miss out on the gains completely.

Disclosure: I own Google and General Electric.

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This is not financial or investment advice. Please consult a professional advisor.

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