Whether we are seeing the beginning of a new bull market or just another bear market rally, the two month upswing has been quite extraordinary. As can be expected, the perma-bears and perma-bulls are out in full force, arguing their case with the vigor of someone that has a direct line to Nostradamus. Where do I stand? While the recent move upward has been encouraging, I have not joined the longs. Why?

Unless one is willing to cut losses quickly, playing rallies during a confirmed bear market can be a dangerous game. Sure, this rally has been more than a three day wonder, and if you played your cards correctly, you are sitting on a pile of money. Congratulations, do not begrudge your success. However, if you played the last several bear market rallies and did not move to sell quickly enough, you could end up in what one of my former non-commissioned officers referred to as, the “hurt locker.” For every rally that sticks, there are three or four that do not.

The meltdown that began in February is nothing short of spectacular. Like a tornado, its ferocity and destruction is frightening, yet fascinating to watch. On Thursday, the S&P 500 had lost 20% since inauguration day, resulting in some calling this recent leg down “Obama’s Bear Market.” To be fair, we have been in a bear market since October 2007. Whether this recent downtrend is the fault of the current administration is “above my pay grade.” What is not above my pay grade (or at least I think it’s not) is analyzing the recent price action of the indexes.

So long, November lows. Last week, the news media, always looking for a headline, were quick to point out the Dow Theory Sell Signal that occurred last week. Of course, there were plenty of analysts that came out of the woodwork to proclaim the Dow Jones Industrial and Transportation Averages as irrelevant indexes, and therefore Dow Theory had no great impact on the market. Since then, the DJIA now sits 7 percent below its November low after only a week and the S&P 500 is now below its November low. The Nasdaq is not far behind. It looks like the Dow Theorists may be right. Sadly, there are not many signs pointing to an improving market.

Currently, the DJIA now faces resistance at the November low in the 7550 area. It has support in the 7000 area. A fall below this level will likely trigger massive selling.

So much for a boring market. The bears certainly arrived on the scene this week. Although some bulls finally showed up, too, it may not be enough. The financials continue to weigh heavily on the market. The thought of nationalizing banks and destroying shareholder equity is apparently a most unsettling prospect for investors. The administration promises to provide more information regarding its methods to save the banks, but will the clarity be enough to satiate the masses and save the markets?

The market is at a critical juncture. In particular, the DJIA is in a great deal of trouble. A Dow Theory sell signal occurred on Thursday after the DJIA closed below its November low. The news of this occurrence was trumpeted by the media outlets. The detractors of the theory claim that considering these indexes are based on only a handful of stocks in the DJIA and Dow Transportation Index, the theory does not provide any true indication of market weakness/strength.

Following the market is starting to become a tedious chore. The back and forth action occurring in the stock market may be fertile grounds for the day trader, but not for the position trader. Long or short, trying to trade in this type of environment is tough. Of course, the million dollar question is “when will it be safe to leave the sidelines and enter the market?” No one can answer that. At this time the only real option is to continue to follow the news and observe the market.

Stock Market Blows Off Bad News

The unemployment numbers were the worst in 35 years. Horrible news, right? Clearly, the economy is a shambles, right? What is the market’s reaction? Why, a rally ensues, of course.

Ever since the bubble burst in oil last summer, OPEC has been feverishly cutting production levels. At this point, OPEC has a goal of cutting 2.2 million barrels a day for this month. However, while downtrend in prices has slowed, why has the price not rebounded, as some might expect?

Part of the reason is that the economic forecast for 2009 is still grim. Some believe that if the world continues to be stuck in a recession for a large remainder of 2009, the desire or need for crude oil will decrease. Businesses will use less resources and consumers will spend less.

Once again, a lot of back and forth action occurred on the indexes, but no real movement. After the most recent sell-off, the market has begun to move in an ever-smaller price range. For those on either side of the spectrum, there are plenty of arguments as to why a new bull market is being born, or the bear market will continue.

The bulls can be pleased that short-term support levels have been established on the DJIA, S&P 500, and NASDAQ. The bleeding has stopped. Bulls can also revel in the fact that over the past two days bears have pushed the indexes down but failed to follow through. In particular, the recent low on the DJIA, 7936, was undercut but still held. Moreover, volume has picked up over the last few days while the indexes have held their ground - possible accumulation?

It looks like the other shoe dropped this week. Just when everyone thought that we may have heard the last of the financial sector’s woes, more bad news hit the wires. The question is how many more shoes are left?

For a time, the market shrugged off negative news. Starting last week though, the market was oversold and there was just too much negative news from the banks for it to ignore. For the time being, the bulls have held the line. Although there is still strong evidence to indicate a market bottom was established in November, that does not mean one should stay married to that opinion should conditions change.

At this juncture, it is difficult to make a reasoned judgment regarding near-term market direction. The current market rally may be in jeopardy and they may soon retest the lows set in November. The other possible scenario is that the market may be experiencing a brief respite before the trend resumes. While this uncertainty might cause one to throw up their hands and give up, it is essential to continue analyzing the market!

As I indicated earlier in the week, the market was extremely overheated. In all fairness to the indexes, the S&P 500 and NASDAQ were both up over 20% from their November lows, so it makes sense for them to lose momentum. Many were expecting a large bear market rally sooner rather than later (myself included). However, the new year is young and anything can happen.

As I have mentioned several times in my posts, I was cautiously bullish about the current rally. However, two indicators have given me pause regarding the current trend: the McClellan Oscillator and the “Percentage of Stocks Above Their 50 Day Moving Average.”

In regards to the McClellan Oscillator, readings above 100 indicate an oversold market. Right now, it stands at 127! As we learned recently, a market can stay oversold/overbought for some time. But, it definitely is a shot across the bow that may indicate the primary downtrend will soon resume.

December has been a quiet month for stocks. Initially, I anticipated the market would have launched into a rally by this time. However, the indexes seem to be taking a quick respite before its next great move. In which direction will it trend? My opinion continues to be that stocks will tick higher. I base this conclusion on several factors.

The indexes have moved above their respective 50 day moving averages. Since the first touch of the 50 dma at the beginning of December, the 50 dma has gone from turning downward to moving sideways; this usually precedes a breakout to the upside. This signal is slightly suspect as the breach occurred during a low volume week. The upcoming week should tell us whether the move is truly legitimate.

I have written about Force Protection (FRPT) a couple of times in the past, once in a not so flattering light, the other time using a more positive tone. In 2007, the stock soared to a high of 30.48 to a low this year of $1.03. Recently, however, the stock recovered. FRPT recently breached resistance in the $5.00 area. Moreover, on December 19, the 50 day moving average crossed above the 200 day moving average resulting in a golden cross - a bullish sign.

Last week, it looked like the market’s price range was tightening to such an extent that an explosive move could be expected. Instead, the price range tightened even more. Sooner rather than later, the market will be forced to break in either direction. A move above the $92 area on the SPY and $30.50 QQQQ would likely rekindle the march upwards.

There are several factors that favor the bulls. First, the uptrend is still intact (see charts below). Second, the Volatility Index continues to decline. The VIX closed below 50- this week for the first time since November 5th.

Despite the emergence of a fledgling rally, stocks making new highs have been few and far between. One of the companies leading the way is of all things, a pasta supplier. American Italian Pasta Company (AIPC) manufactures pasta that is then sold to well-known pasta companies such as Mueller’s (my all-time favorite) and Ronco. AIPC currently has a market capitalization of $450 million and a P/E ratio of 22.

Why is this consumer staple stock showing such tremendous growth potential? AIPC is benefiting from increased pasta consumption in the United States (likely the result of people shunning the once-popular no-carb. Atkins Diet). On December 10th, AIPC announced a year-over-year fiscal fourth-quarter revenue increase of 47%. Earnings estimates for 2009 range from $1.10 to $2 per share.

“I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.”

-- Senator Harry Reid commenting on the failed auto bailout bill.

After numerous false calls made by CNBC pundits and other assorted gray beards, the market may indeed be in a bottoming process. To be clear, five out of five up days on the SPY, with some of them occurring on low-volume during a holiday-shortened week, does not constitute the beginning of a new bull market. However, it is refreshing to see prices stop sliding downward.

The market action of November 21 and 24 resulted in the biggest two-day rally for the S&P 500 since 1987. Some analysts are dismissive; they argue that the largest rallies occur in bear markets. This misses the point. While these large rallies take place in bear markets, they also occur at market bottoms. In October 1987, after a large 20% percent drop on “Black Monday,” the S&P 500 rallied for two days, gaining 13%. In December 1987, the low was retested, confirming the bottom.

When it comes to analyzing the markets, technical and fundamental analysts are quite often at odds. There is one cardinal rule of investing upon which they can all agree: That you should never fall in love with a stock.

Like most rules, it is easier to recite than to practice.