The S&P 500 is now at a two-year high, closing last week at 1,240.40. The index last hit that level in September 2008.

Some analysts believe that the market trades ahead of what it sees in the economy six months out. If that's true, Wall Street expects improved employment, a moderately rising GDP, and early signs of a real estate recovery.

There are bull markets and bear markets, and while each often display a pattern that matches historical precedents, there are those 'irregular periods' that break the mold. Moreover, investors need to remain cognizant of that fact that an irregular period can be long. Very long.

For example, consider the period beginning in the mid-1960s. The Dow crossed the 1,000 mark for the first time in January 1966. President Lyndon B. Johnson (D-Texas) was in the White House then, and he was in the process of escalating the war in Vietnam. Inflation rose, due to ramping defense and social spending. The Dow soon dropped below 1,000.

At the beginning of a bull market, it's often the most speculative stocks that perform the best. As the market has rebounded over the past year, the Dow Jones Industrial Average ($INDU) is up about 40% while the S&P SmallCap 600 Index is up about 58%. And that is exactly why Richard Moroney, editor of Dow Theory Forecasts, is now sounding warning bells.

"The risk trade has defied conventional wisdom by continuing this year, tempting some investors to throw out their playbook and join the rush into high risk stocks," says Moroney.

Moroney warns that investors chasing after risky companies will now be paying a premium for low quality merchandise. Instead, he suggests that investors pursue attractively valued stocks with good fundamentals.

Last Friday, we learned the economy added 123,000 jobs, the most in three years. Investors everywhere are now waiting for the Dow to cross the 11,000 mark and hoping that the 6% added to the major indexes in March will happen once again in April as we enter earnings season.

Personally, I don't think Dow 11,000 really means anything. But I'll admit I'm pretty fired up about the upcoming first-quarter earnings season. Since the first quarter of 2009 was arguably the worst part of the recession, favorable year-over-year comparisons will lead to blowout results for most companies. In fact, I expect the S&P 500's operating earnings to be up almost 70% during the first quarter on average. With numbers like that, it's easy to imagine the market will post significant gains.

The great debate: Have we reached bottom in the financial crisis, or is there more to come? It's a multi-million dollar question.

Reuters conducted a poll on April 21-27 to get feedback form analysts across Europe and the US. The sobering conclusion was that the recession could last a year or two more. Most said that the worst is yet to come. Their findings stated: "Financial and macroeconomic stability are still some way off and we don't yet have the foundation for a solid recovery."

The headlines are terrifying. The jobless rate is the highest it's been since 1983 -- 8.1% -- and it could get worse.

"We'll be at 10% unemployment by year end," Joseph LaVorgna, chief U.S. economist at Deutsche Bank, told the Wall Street Journal (subscription required). "What's going to stop it?"

The gloom and doom crew has been winning the day lately, but here's the question: What does it all mean for stocks?

Go back to 1983 for the answer -- four years after BusinessWeek had declared the permanent death of equities. That year marked essentially the beginning of the greatest bull run in history. From 1982 through 1999, the Dow Jones Industrial Average soared from 800 to over 11,000.

Once again, the Dow has registered a lame, listless rally and then moved back below 8,000.

For those investors who may not follow indices closely, the 8,000 level has psychological but not technical support. The latter measures such things as the number of investors who are buying / selling, whether investors are committing new money to the market etc.

Right now a battle is taking place between bulls and bears at the institutional investor level: the bears argue the worst economic news stemming from the financial crisis is yet to come; the bulls say that the worst news is behind us, and that government stimulus, fiscal and monetary, will both stabilize the financial system and get the U.S. economy moving again.

The Dow Tuesday closed below 8,000 at 7,949. If the bears can keep the Dow below 8,000, then push it through 7,800, then 7,600, it will not be a pleasant time for investors.

Some institutions may continue to hand-sit until mid-February, preferring to await the Obama Administration's announcement of the exact size of the fiscal stimulus package, now believed to be approaching $725-850 billion.

One hears the mantra almost daily, often from friends and relatives:

Aren't stocks cheap? Look at those low P/Es! GE is at $15 a share, Intel below $14, Du Pont at about $27. My goodness, the Dow is down to 8,200. Isn't now a good time to buy stocks?

It is, if you believe the Dow is forming a bottom and/or that the worst of the financial crisis is behind us, and the U.S. economy is set to recover.

However, the alternate viewpoint argues that the Dow has not bottomed, could very well fall another 1,000 points, with panic selling (known as 'capitulation' in Wall Street circles) taking the Dow to levels well below that, at least for a short period of time, possibly longer.

Hence, purchasing shares for the first time now (or adding to existing positions) given the latter scenario would create an immediate 10% loss, or possibly more.

Monitor corporate earnings and job growth

What's a better tack to take concerning when to buy more shares? Monitor U.S. corporate earnings and job growth.

Talk to the stock market's bulls and they argue the Dow is forming a bottom at / near 8,000.

Talk to the bears and they say you're dreaming, if you think the Dow has bottomed at 8,000.

What's the typical investor to do?

Let's do a condensed, cross-methodology analysis to see if we can arrive at an informed investment decision / conclusion.

Technical Indicators: Bearish.
Fundamental Indicators: Bearish.
Monetary Policy: Officials are doing everything they can to stimulate growth. Bullish.
Fiscal Policy: More fiscal stimulus should be on the way, in both the U.S. and aboard. Bullish.

Credit Markets: Recovering, but still strained, with still too much interbank distrust / fear. Bearish.

Geopolitical Risk: On average, it's about the same as it has been during the past 3-5 years. Neutral.

Conclusion: The view from here argues that the outlook for U.S. stocks / stock market is bearish at least for the next six months, and most likely for much of 2009. Further, if Dow 8,000 doesn't hold, the market could fall much more, particularly after 2009 earnings estimates are revised downward, as they are expected to be.

Investors have become accustomed to bull markets -- long periods of stock price appreciation, i.e. a rising stock market. That's been the norm since the start of publicly-traded stocks in the United States, and certainly a feature of markets in the post-1980 period.

Provided that the U.S. economy is growing in a sustainable way and increasing its productive capacity, bear markets have been the exception, the momentary pull-back, when one takes a long view of the investment horizon.

The current bear market can be seen in that light, again, provided the nation's economy is on a sustainable growth track with an increasing productive capacity.

Still, the key in the above has been the U.S. economy (obviously). Absent a healthy economy, different Dow case studies pop up.

For example, what if the Dow didn't fall -- and didn't rise -- for seven years? In other words, a sideways Dow where no progress is made? It seems like a remote possibility, but that's exactly what occurred from early 1966, when the Dow fell below 1,000, until late 1972, when the Dow reclaimed the psychologically-significant 1,000 level.

Oil declines by $30 from record highs. Other commodity prices moderate. The dollar rallies. The nation records better-than-expected GDP growth in Q2.

All are positive data points that suggest that the U.S. economy, while it's certainly not in the midst of robust growth, has not run totally into a ditch, either.

What do the latest economic data points mean for the Dow Jones Industrial Average, and U.S. stocks, in general, for the next six to nine months? Here's the bullish and bearish cases:

Bullish case: Technical analysts would cite the Dow's close above the 50-day moving average for three consecutive days, the fact that the Dow held support at the 11,000 level, and a series of higher closing highs and higher closing lows in the past two months.

Further, technical analysts would also cite the fact that the Dow has completed the volume-light June-July-August summer season (typically bearish for stocks) during a period of anemic growth (if the U.S. economy isn't already in a recession), without plunging to nerve-wracking lows. True, the Dow fell from about 12,400 in June to 11,000 in July, but technicians would cite the aforementioned positive technicals as an argument that a bottom is in place.

Bearish case: Technical analysts would cite the fact that the Dow, although above the 50-day moving average, nevertheless remains below the 200-day moving average -- the toughest moving average line to break in trading. Also, market 'up days' have lacked sustained buying strength as measured by the MACD Histogram.

Further, and equally important, Dow bears would say that although the Dow has risen from its 11,000 low, the roughly 600-point increase is still well within the range of a correction -- or in this case short-covering -- in a long-term bearish trend. In other words, the Dow's recent rise could be Pyrrhic or false -- a classic example of a 'dead cat bounce.'

Market Analysis: With all due respect to technical analysts and their indicators, the view here argues that investors/ traders should take their cue from the U.S. economy's fundamentals: specifically, corporate profits and job growth. Absent substantial, sustained gains in each, any Dow rally is viewed with skepticism.


**

What's your view of the Dow? Is this stock market rally real? Or is it temporary? Let us know what you think.

We've been on the phone a lot with investors over the past few weeks. I don't know about you but from where we sit, there is a lot of fear in the market. Investors are worried: worried about what's going to be, how low the markets can go, how the dollar will continue to drop, inflation, etc. There's what to worry about.

But, there is a counter-Chicken Little story setting up behind the backdrop of fear. Bloomberg has an interesting piece out this morning entitled "Buy Signals Abound in U.S. Stocks Shadowed by 1970s". Bloomberg reporters draw comparisons with the almost 20% drop in the S&P 500 (Amex: SPY) we've seen since the October highs.

So, are things any different this time?

Well, for one, Bloomberg claims companies in the S&P 500 are trading at their cheapest levels in more than 18 years to forecasted profits. That means investors believe that forecasted profits are going to fall way short of projections. If the world doesn't come to an end, Bloomberg thinks there may be an opportunity here.

Secondly, valuations versus 10 year Treasuries are also lowest in at least two decades.

Investors don't want to hold stocks. I can't blame them. Anyone who's been trying to pick up some value has probably seen their trades go against them.

I ran into an interesting article in Fortune titled "Don't expect another bull market: Stock returns may never be the same -- at least for this generation of investors." The article made a bold prediction:

Barring a miracle -- or the creation of a New Math of the market variety -- there's no way we'll ever see a bull market along the lines of what so many of us grew up with.

This is very interesting from a sentiment viewpoint. A few years ago, at the height of the dot com boom, some claimed that we were creating a new economy in which the stock market could not go down. Then it crashed.

I say, don't buy into these extremes. In the long run, the market will have ups and downs, but will continue a slow long-term uptrend. We may have rough periods of adjustment -- like we are currently seeing in housing -- but that doesn't mean that the fundamentals have changed.

Articles like this can be a good contrarian sign. As writers predict the end of stock market gains, it may be a sign that we have reached the bottom.

Kevin Kersten is an Stock and Options Analyst with InvestorsObserver.com. Disclosure note: Mr. Kersten owns and/or controls a diversified portfolio of long and short positions that may include holdings in companies he writes about.

Now that's not the way to close out the first week of the new year: for the week the Dow fell 4.3%, the Nasdaq declined 6.3% and the S&P fell 4.5.%.

Further, there are various ways to interpret the Dow's 256-point drop to 12,800.18 Friday.

[The Nasdaq closed down 98.03 points to 2,504.65, the S&P 500 closed down 35.53 points to 1,411.63. Oil fell $1.27 to $97.21, gold declined $3.40 to $865.70, and the 10-year U.S. Treasury closed at 3.85%.]

Obviously, Wall Street's current consensus - - its chief culprit - - is the December 2007 job report, announced by the U.S. Labor Department, which indicated that the U.S. economy created just 18,000 new jobs - - a whopping 52,000 shy of the 70,000-job estimate.

In case anyone is still feeling bullish, Paul Farrell of MarkeWatch has produced a list of 20 triggers that will end what he calls "the aging bull." Here are some of his suggestions for possible "tipping points" that will bring an abrupt end to all this fun. Here are some of the ones I think could be particularly catastrophic:

• Trade imbalance
• Real Estate markets problems
• Skyrocketing Oil
• Surging consumer debt
• Issues of international credibility

Interestingly, I disagree strongly with his concern about "Washington politics in endless gridlock." Isn't that a good thing? If the best government is the least government, what could be better than a bunch of bureaucrats in Congress arguing and accomplishing nothing -- i.e. not spending our money?

Take a look at the list and let us know what you think the top concerns are.