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.

Are you confused yet? On Monday, the U.S. equity markets added to the September rally after better-than-expected Chinese growth numbers and less- stringent-than-feared Basel III requirements. We are now sitting right at the top end of the summer range in the S&P at 1,122. Bearish speculators will know very soon if they are wrong. A close above the 1,125 to 1,130 level means it's time to cover. This provides a very high risk/reward entry point on the short side.

Yesterday's market action continues to confound. The S&P 500 climbed 1.11%, while Treasuries also rallied. The iShares Barclays 20+ Year Treasury Bond ETF (TLT) jumped 0.49% to $102.82, despite the fact that this was supposedly a "risk on" day. Something is going to give. Either we are going to see a major, sustainable rally in equities, or there is going to be a savage sell-off. There is too much confusion right now.

There's an old adage: When bond prices go up, stock prices go down, and vice versa. Over the past three months, Treasury bond yields have taken a big hit (bond prices and bond yields move in the opposite direction). The benchmark 10-year bond yield dropped from 4.01% in April to its present 2.79%.

David Rosenberg of Gluskin Sheff has researched bond yields and their corresponding effect on the stock market. According to an article on CNBC.com, Rosenberg found that if yields fall more than 1.20%, a bear market in stocks is just a couple of months away. He cites the bear markets of 1990, 2000 and 2007 as examples.

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.

TheStreet.com's Jim Cramer says the rally hasn't been a sham, but a bigger pullback would be reasonable.

I love it! Suddenly it's S&P 900 or bust! Nothing underneath us. The rally revealed as a sham. Even better, a rally in a bear market!

Now we are talking.

A 45% rally in a bear market. Maybe China had an 85% rally in a bear market! We may have had a 7,500-point rally in a bear market since I started trading 30 years ago.

I am even thinking that we have never had a bull market!

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."

Steve Leuthold earned an astounding 74% return for investors in his Grizzly Short Fund last year betting, as the name would suggest, that stocks were in for a grizzly beating -- which they were.

But now Leuthold has turned bullish, and is predicting that the S&P 500 will hit 1,100 this year -- which would represent an increase of more than 30% from the the current price.

Nouriel Roubini, professor of economics at New York University, was one of the first to predict the collapse of the U.S. banking system and the current financial crisis. Well, he's back in the news with his forecasts.

What does he see in our future? More bad news. The bear market is not over, says Roubini. The stimulus package will slow the rate of contraction, but that will take time. Macro news, earnings reports and financial shocks will be worse than expected.

Technicians continue to bemoan that, despite the oversold internal indicators and sentiment numbers that show record levels of fear, the market continues to sell off. Normally at such oversold levels of the key indicators we should expect a rally -- but not lately.

A rally may be overdue but, so far, all we seem to get is one or two days up and then down again. The mood is best described by a Standard & Poor's market strategist who on Friday said, "We think the market is in desperate need of a washout to at least turn the tide for awhile back to the upside. We have been looking for a counter-trend rally, but all we are seeing are one-day wonders."

So where is the bottom -- or bottoms?

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.

One by one, the key indices appear to be breaking their support lines.

The Dow Industrials were the first to break, but the S&P 500 has also fallen through its support zone at 800 to 820, and so has the NYSE Composite. Only the Nasdaq is holding above its January low while the others are in a full test of their November bear market bottoms.

But despite the full attack on the bear market low, it would be dangerous to assume that a market sell-off is inevitable.

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.

Typically, when the economy enters a recession, companies that are in the consumer non-durable sector, i.e., consumer staples, see their stocks trade higher as money flows into bulletproof subsectors of the economy that don't suffer from spending cuts.

Companies like Proctor & Gamble (NYSE: PG), Heinz (NYSE: HNZ), Hormel (NYSE: HRL), Kraft (NYSE: KFT), General Mills (NYSE: GIS), Johnson & Johnson (NYSE: JNJ), Pepsi (NYSE: PEP), Coca-Cola (NYSE: KO), Campbell Soup (NYSE: CPB), Colgate-Palmolive (NYSE: CL) and even Berkshire Hathaway (NYSE: BRK.B), which was down a whopping 49% before getting a year-end bounce.

I think Warren needs to get off TV and get back to work.

My point here is that all of these fortress names got beat up to the tune of 30% to 50% when they were supposed to be the go-to names that would put in a stealth rally in a bear market.

Seems the kitchen and bathroom stocks didn't work this time around.

Bryan Perry is a contributor to OptionsZone.com.

The world's largest economy is on pace to record its longest recession since 1947, a survey released Wednesday predicted.

A decline in consumer spending will push U.S. GDP down 2.4% in Q1 2009, and another 0.5% in Q2 2009, according to 51 economists surveyed by Bloomberg News.

If the above occurs, it would be the longest U.S. recession since 1947, so says economist Richard Felson, who did not participate in the Bloomberg survey.

"It would be a truly negative circumstance, the weakest economic conditions since the end of World War II and the weakest job market conditions since the 1981-1982 Reagan recession," Felson said. "A Q3 2009 recovery would give us a 20-22 month long recession, which is just dreadful. But you can understand why, with housing, manufacturing, exports, business investment, and consumer spending all trending in the wrong direction. It would be the 'mother of all contractions.' "

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.