Cause For Pause: When Is A Rally Really A Rally ?

Lots of questions on Wall Street last week. Can a rally be sustained? Will it just play itself out and return to a benchmark plateau at the end of the rally? Can a series of short rebounds establish a rally? 

Is 20 consecutive days the right barometer? 30 days? The opposite of a rally is a retreat. Is there a clear signal?

According to investorwords.com, a technical rally is defined as: Upward price movement powered by forces related only to the price movement of a particular security or market in contrast to external economic forces or fundamental factors affecting a company's business operations. How important is the underlying economic data to a rally?

The DOW dropped from the 9,900 level in June to the 7,700 level and has slowly moved backed into the 8,800 range. Not for those with a weak stomach. Hitting yearly lows last month, most of the indices have climbed back by 10-15 percent. One of the keys seems to be volume. Stocks trend higher on strong volume. "Not that we've returned to a bull market," said one analyst, "but I think this current rally has legs."

Market observers have a consensus that only investor participation will propel the markets higher and as the corporate scandals are dealt with, confidence will return. Many traders note that a sustained rally into a bull market could occur if certain factors were set in place. Volume, individual investors returning and a broad mix of stocks participating in the upswing, not just a few blue-chips or household names.

"The bears are still in charge," said one financial writer. "The strength of the bulls remains to be seen. We'll know its a real rally when the bears head for the caves and the short-selling begins to subside. A continuous momentum of advancers beating decliners wouldn't hurt." 

Ups and downs aren't always predictable, but political and economic forces often play a role.  Low interest rates, tax cuts, high employment -- these positive factors traditionally have the effect of sustaining a rally.  The only downside we have these days is the traditionally negative factor of international conflicts. 

Perhaps the wisest old axiom on Wall Street at present is the one that says, "It takes a lot longer to climb 1,000 feet than it takes to fall 1,000 feet."
 

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