Indeed we're looking at a uniquely bullish situation today. The major market indices have broken out of long-standing basing areas and the 200-day moving averages have turned higher. It's the first time we've witnessed such technically constructive action since the bear market began. If ever there was a time to be bullish, this is it.

And indeed lots of folks are full of bull nowadays. Many mutual funds are almost fully invested. Small-cap, low volume stocks are up big time, a sure sign of active small investor speculation. Sentiment readings stand near extremes. Investors Intelligence reports that as of 7/17/03, 57.4% of advisors were bullish while only 17% were bearish. The numbers were even more extreme during mid-June, but continue to demonstrate rampant bullishness in the investment community.

If you don't find the bullishness alarming, consider that the S&P 500 has only rallied about 29% from its March low. Without a doubt it's the biggest bear market rally that we've seen yet. But does it justify fervent bullishness? For a market that lost 50% of its value in the past few years, is a 29% rally that big a deal? Let's face it folks: this rally is only a bit bigger than the other periodic sucker's rallies we've witnessed. Why all the ballyhoo?

Were the market up fifty or sixty percent I'd understand the rampant bullishness. But at 29%, we really have to wonder what has folks' knickers in such a happy twist. I'm reminded of Steve Martin in the film "The Jerk", jumping for joy upon arrival of the new telephone book. "The new phone book is here! The new phone book is here!" Only a jerk gets that excited about a new phone book. So what can we say about a public that is giddy about a relatively minor 29% stock market gain?

Now, I'm certainly not suggesting that the public is a bunch of jerks. Long-time readers know that my disdain for the naive, crowd-following investing masses and the mainstream financial media flakes precludes me from heaping such adulation and adoration upon them. I'm merely pondering the significance of what appears to be an extreme response to a not so exceptionally significant event.

Donning my psychology cap, I venture the following guess: The public is not nearly so excited by the market's gains thus far as it is by expectations that the bear market is over and a new bull market has begun. Folks are ecstatic that after three years of huge losses a new era of making back all those losses, and then some, has begun.

That's a lot to be excited about and would certainly justify extremes of bullish sentiment. If but it were true, that is.

Personally, I couldn't make a good case for a bear market bottom if my life depended on it. Believe me, I've tried. I'm no "permabear." I love bull markets. Bull markets are easy money, the kind of money that I like best. If anything about this bull even smacked remotely of genuine, long-term bullishness I'd be all over it like flies on stink.

But bulls begin after bears END. And bears tend to end when market valuations become so exceptionally compelling that the smart money simply has to buy, even if economic conditions have not yet turned. At no point during this bear did the market reach compelling valuations. In fact, in looking at p/e values, it becomes apparent that the market never so much as momentarily strayed from overvalued levels. Major bear market bottoms have usually been in the less-than-ten range of p/e valuations.

Oh sure, based on projected earnings perhaps the market got into the mid to high teens. But one need only briefly peruse the analysts' track records over the past few years to know that projected earnings are hogwash. The only thing true about projected earnings these days is that they get revised downward over and over and over again.

Projected earnings are crap, to use the technical term. Earnings ACTUALLY earned are the only kind of earnings that pay the bills. If you can't haul your earnings down to the bank, they ain't real, folks!

Personally projected earnings in my late-teens were somewhere around one million dollars based on expectations that my college "recession" would soon turn the corner and rock 'n' roll star status would soon be delivered upon me. However, actual earnings came in at around $3.50 an hour. (By today's pro-forma accounting principles, that's somewhere around $98 a minute, of course.) I have still less faith in the projected earnings of the so-called "experts."

What about capitulation, another classic sign of market bottoms? Was the public ever disgusted with stocks? Did they throw in the towel? Did they ever lose faith in stocks the way that the public traditionally does near major market bottoms? Hardly. For the most part the financial media and the public never gave up on their conviction that the next bull was right around the corner. They held on throughout the bear and now they're about to be rewarded for their "patience"?!

There is one rule in this business that can never be violated for long. It is: cut your losses. Take small losses and protect your capital so that you can remain in the game when the next opportunity for big gains comes along.

Are we to believe that the majority of the public which has violated this cardinal rule of successful investing for three years running is going to get away with it and come up smelling like a big old bunch of happy roses? That the average investor and financial media bubblehead will not only have survived the bear market but has now accurately called its long-term bottom and will soon thrive in the ensuing bull?

That would indeed be a miraculous feat. It would be the first time ever. It would mean that incompetence and a total disregard for discipline would have paid off in a big way.

Certainly if we look at the net worth of the average politician we could make a good argument that incompetence can in fact be profitable. But in the real world of investing, where there are no safety nets, where having a big taxpayer-filled coffer can't buy you success, where a good PR team doesn't help -- incompetence, breaking the rules and a lack of discipline are a guaranteed path to financial ruin. I find it very hard to believe that history has been tossed out on its ear and the investing public is about to be handsomely rewarded for its ignorance.

I've said it before and I'll say it again: this is NO bull market. I won't argue with the current uptrend (in fact we at TSS are invested in it) but I will keep one eye trained firmly on the exits. Maybe this is a cyclical bull trend within a secular bear market, but if the indices go on to post new highs within the next few years I'll eat my hat. Or I'll pay somebody else to eat my hat since frankly, after having eaten several hats and washed them down with a liberal helping of crow, I've developed a strong distaste for hats. And crow.

Right now the market stands at a critical juncture, the resolution of which will likely determine whether this "bull" has run its course or if it has some more room to roam.

The S&P 500 recently failed to take out its high and has formed a potential double-top formation. At this point the pattern could be construed as either a consolidation or the makings of an important top. The 962 and 1015 levels have established themselves as critical support and resistance, respectively.

Should the market decisively exceed resistance at 1015, our original forecast for a move to 1150 becomes a distinct possibility. But a decisive penetration of the 962 level would confirm that an important top is in place and that the S&P 500's breakout above 965 has failed. In that scenario, a test of the bear market lows becomes increasingly likely.

Only time will tell but for now I'm keeping one foot on the gas and two feet on the brakes. If I had a fourth foot I'd keep that one on the brakes as well...

Mark M. Rostenko
Editor
The Sovereign Strategist

Mark M. Rostenko, a veteran of Chicago's commodity exchanges and editor of The Sovereign Strategist, spends far too much of his time enthralled by the never-ending procession of inane prattle emanating from Wall Street. Nonetheless, it hasn't stood in the way of accurately forecasting the dollar's top, the beginning of the gold bull market, and nearly every significant turning point in the stock market since the bear market began. Please visit www.sovereignstrategist.com for a free sample issue and more commentary. And while you're there, feel free to join our international family of well-informed and successful investors.