Is the rally over?

One thing I like to watch in finance is the trend of opinion. There are a few ways to look at it, from the general sentiment indicators (are money managers bullish or bearish?) all the way down to the individual opinions of those with good track records. There's also the socionomic angle, such as why is Bob Prechter showing up now?

In January, Marc Faber said the S&P 500 could drop 20% after a spring rebound. (He expects Bernanke to print money at that point and halt the decline.)

Tim Knight has posted his latest Big Picture review.

A new short sale rule has ominous implications, not because of the policy itself, but because the government always mistimes its policies, such as passing recession fighting programs once the recession is over. (This time we have a depression and they, like Hoover and Roosevelt, do not know how to fight a depression.)

Economically, things are not looking good. The deadline for applying for extended federal unemployment benefits ends today.

And it turns out that 40% of the banking system and 3000 community banks are exposed to the coming commercial real estate crisis. Many warned about the risks of the housing and subprime markets, but most people do not believe something is a crisis until it is unfolding before their eyes. Therefore, despite the years of warnings, this will not affect the market until liftoff. Even if the market tumbles in April or May, commercial real estate will not yet be a concern—though the slide could trigger liftoff since it could damage the developers' ability to raise capital.

If we see a true deflationary crash, expect gold to tumble along with the markets. Prechter's admonition to load up on cash is appropriate. Also, the U.S. dollar is likely to rally against everything except the Japanese yen. At the end of the slide, the yen may be strong enough to put the Japanese economy at the center of international concern.

I've jumped the gun on the end of this rally so many times, however, that I'm waiting for a clear sign of a break. The previous year of market action suggests a bounce and climb to a new 52-week high and the S&P 500 Index is right at its 50-day moving average. The line is about as flat as it can get, suggesting the next move will bend the 50-day average in its direction. A break higher would be bullish, with the previous high of 1150 as the target for now. A break lower would be bearish, but the S&P 500 would need to drop more than 6% before it reached its 200-day moving average of 1033.

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