I hope my last two missives prepared you sufficiently for this latest bear rally, and my declining interest in resisting the siren song of the bulls in the short-term. If you are lucky, you even dared to take my advice and seek some profit from the current madness. The key to surviving this game is to keep an open-mind and always ask yourself how your current strategy and thinking could be wrong - and prepare for it - either by profiting from it, or protecting yourself from your mistakes. We prefer the former of course!

Make no mistake about it. The rally since the March lows has been quite impressive. The market has been flooded with so much cash that almost EVERYTHING is going up. Breadth is simply incredible...the vast majority of stocks now are in clear up-trends (again, at least short-term ones). No sooner does a stock sneeze and loose a few pennies, do the bulls quite happily rush in, buy, and carry the wounded to safety for some rest, healing, and relaxation in preparation for the next run. Folks, we are back in dart-throwing territory. In fact, this rally has been steady enough that it has given enough time for bulls to make money at almost every point of entry and it has sweet-talked bears into betting against the tide - usually to their dismay - and thus providing more fodder for the upside..

Most astonishing, one of the major stock indices, the Nasdaq, has beaten back those December highs I have talked so much about. While the S&P 500 and the Dow have not quite attained such lofty heights, I must take a pause and admire the resilience of the tech stocks. Pundits have continuously insisted that the leaders of the last bull market will not be the leaders of the next - and yet, here are tech stocks asserting their clear dominance over the rest of the market again. Moreover, the Nasdaq has now cleared the hurdle of the downtrend line for the ENTIRE BEAR MARKET (although note my favorite technician disregards this event since the Nazz has been so far detached from this line for so long). Once all three indices get above this mark, there truly is no telling how far the market might run before running into a serious brick wall. You can imagine I am watching these developments quite closely.

To add fuel to the fire, the Fed has put us all on notice. The Fed is going to make holding onto cash more and more painful, if we do not start spending and investing more, consumers AND businesses. Heck, they have all but said they are ready and waiting at the printing presses to just print more money and hand it out on the streets until people are forced to spend it just to get rid of it! This has produced effects which typically work against each other. It has emboldened stock investors to pour cash in the market because it is clear that trying to make money anywhere else may be next to impossible. Even my favorite "pseudo-cash" investment, high-yield junk bonds, have been on a tear. On the flip side, the monetary easiness of the Feds has put the bears on alarm bigtime. The dollar has sunk significantly, especially against the Euro, and gold is on the rise again as a hedge against paper currency worldwide getting more and more worthless. Ironically, since the Fed is gearing up to fight deflation and further economic weakness, Treasury bonds are back in vogue on another rally that pundits not too long ago thought next to impossible. Last year, I declared that the Fed was fooling itself when they essentially claimed they were finished cutting rates for this economic downturn. I predicted then that the Fed would likely take rates close to zero, and, hey, they are almost there! For some good articles on some of these cross-currents, check out these good pieces in the New York Times (free registration required):

A Greenspan Tactic Buoys the Bond Market (http://www.nytimes.com/2003/05/09/business/09NORR.html?8ym)

By giving a boost to the bond market while not alarming stock traders, Alan Greenspan pulled off a neat trick.

Fed Starts to Fret Over Falling Prices (http://www.nytimes.com/2003/05/09/business/09DEFL.html?8ym)

Economists have been talking about the dangers of deflation for several months, but why did the Fed take note now?

Now, you MUST ask yourself....how can bonds rally on the prospects of further economic weakness, and stocks rally on the hopes of essentially an upside surprise? That is indeed the conundrum, and you better believe it will be resolved one way or another. My bet stays on the side of economic weakness. There is so little in the economic news this year that indicates we should expect the robust growth that stocks are pricing in again. I know this is like a two to three year broken record, but so are these bear rallies.

Regardless of whether you are bull or bear, you MUST respect the market. And right now, the market insists on going up. But as I have warned before, try your best not to get seduced. I see plenty of indications that the PERFECT conditions are being laid out to make way for the worst sell-off of this bear market. This is the final wash-out that I continue to anticipate. I thought July or October, 2002 could serve as the final wash-out but each too quickly gave way to more speculative frenzy. This sell-off may not be as deep as earlier ones, but it will be so painful because it will catch so many by surprise as so many will have finally bought into any number of reasons for why the stock market should keep going up and up and up. I have no idea when this might happen or what the final catalyst will be. But, assuming this "final crash" happens this year, you can take your pick of the usual suspects: "sell in May and stay away", July earnings where no sign of second-half strength shows up, September earnings warnings that seal the case of no robust 2nd half comeback, or October earnings when people finally let go of half a year of earnings fantasies. Whatever your bias, as always, just be careful out there, please!

Be careful out there!