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Just another bear-market rally? Some signs hint otherwise

March 24, 2009 |  6:30 am

The stock market's rally is nearing a critical point: This could become the biggest rebound of the 17-month-old bear market, surpassing the late-November-to-early-January rally.

If that happens, the obligatory question will be whether the bear finally is dead and a new bull market has begun.

After Monday’s 7.1% surge, the Standard & Poor's 500 index was up 21.7% from its 12-year closing low on March 9.

That compares with a 24.2% rise in the S&P from Nov. 20 to Jan. 6, before sellers swarmed again and drove the market to new lows.

Bearrallychart The Dow Jones industrial average is up 18.8% since March 9, compared with a 19.6% advance in the previous rally. The average New York Stock Exchange stock is up 22.7% this time, still trailing the 28.3% gain of the last rebound.

The bull case is that every bear has to die, and this one already has done more damage than any other of the post-World War II era. So if we haven't entered a new Great Depression, and enough investors have faith that the economy is bottoming, it would be natural for stock prices to begin to recover -- or at least, stop falling.

Art Hogan, chief market analyst at Jefferies & Co. in Boston, believes that investors correctly sense that "the velocity of bad news is slowing." He notes the 5.1% rise in existing home sales in February, albeit from dismally low sales in January.

The Obama administration's unveiling on Monday of the long-awaited plan to deal with rotten bank assets, while still short of some major details, nonetheless offered hope to a market that was clearly hungry for it -- a big turnabout from the "sell on any news" mood of a month ago.

Market technicians have to be happy with the breadth of the current rally. According to market research firm Bespoke Investment Group, the net percentage of rising stocks on the NYSE over the last 10 sessions has been the highest since August 1982 -- the month the great 1980s bull market launched.

Then again, the current breadth may be indicative of nothing other than that "short sellers" have been scrambling to temporarily close out their bearish bets.

If we are repeating the 1930s experience, short-term rallies far bigger than the current one could ensue, only to give it all back. Within the 1929-1932 market plunge the Dow index rallied 29% or more on three separate occasions.

Investors who are searching for more convincing signs of new bull markets ought to look overseas. The Brazilian market, for example, has been remarkably resilient this year even in the face of Wall Street's meltdown. Brazil's main market index is up 13% since Dec. 31, compared with the 8.9% drop in the S&P 500.

In Russia, the Micex stock index has rocketed 37% this year. China's Shanghai composite index is up 29%.

Emerging-markets guru Mark Mobius of Templeton Asset Management told Bloomberg TV on Monday that he believed those markets were "building a base for the next bull market.”

If nothing else, the action overseas has restored the case for diversification: At least we're no longer in a situation where everything in a portfolio is falling off a cliff at once.

-- Tom Petruno