Analyzing This Bear Market Rally

Looking back over the landscape of the markets, the S&P 500 Index hit an intra-day low of 666 on March 6, 2009. Since that point, the market has rallied more than 16% through yesterday’s close. It begs the question — could this rally extend higher?

The answer is most certainly, "yes." But let me explain what I think is a more probable scenario. Within the context of bear markets, there are always sharp relief rallies that give investors hope for better times ahead. However, as I said in my CNBC appearance this morning, I believe this rally will be short lived and does not constitute the start of a new bull market in equities.

There will be opportunities for trading profits (more on that below) but for most individuals who are over-invested in mutual funds and stocks, I see this rally as an opportunity to reduce risk in their holdings. If you are fully invested, you may want to consider paring back your exposure to stocks above the 800 level on the S&P 500 Index.

Let’s check on a performance table of the S&P 500 Index and its sector breakdown for the last week:

As you can see, financial stocks have led this rally higher, which intuitively makes sense because they were the most beaten down sector year to date. I believe that the financial sector has further to run as this rally progresses but it’s important to watch how the leaders perform if and when this rally fizzles.

Remember that risk remains high throughout 2009 and I have been recommending that you manage your portfolio with a high cash position and tight stop losses. As always, we will be with you every step of the way with our weekly updates in the Making Money Alert.