Due to the holidays, this will be a brief comment.
We continue to view the current strength as a classic bear market rally typical of prior periods. Even the 1929-1932 market that declined 89% had at least five strong counter-trend rallies. The rally has taken place directly off a March 9 S&P 500 low of 666 without the retest that typically occurs at major bottoms. At the very least a retest of that low is a high probability, and it could very well fail.
Furthermore the fundamental assumptions underlying the rally are somewhat suspect. The Wells Fargo earnings report is not likely to be typical of most banks, and does not indicate a recovering economy. The recent rapid rate of decline in the economy was unsustainable, and there are numerous signs that it is no longer falling off a cliff. The economy is still falling, albeit at a slower pace, but there are no signs of an imminent recovery. Major problems are still ahead including a continuing rise in home mortgage foreclosures, credit card delinquencies and a rapidly deteriorating commercial real estate market. And let's not forget that debt deleveraging has barely gotten underway, and has a long way to go. As for valuation, the 2009 estimate for reported (GAAP) earnings for the S&P 500 is only $35 (and probably headed lower), resulting in a P/E ratio of 24 at today's closing price. All in all, we think this rally will soon run out of steam and retest the prior low with a good chance of going even lower