Why This Rally Is Different

Analyzing the market is never a simple exercise, but interpreting the gyrations of the worst bear market since the Great Depression has proved especially difficult.

The three-year bear market has been no simple free fall. It has featured five bull leaps, with each one lifting the S&P 500 by more than 20%. Four previous rallies began impressively and raised hopes that the carnivorous bear had been vanquished, but each ended badly for the bulls as ensuing retreats dug ever-deeper holes for stocks.

The latest upswing, which pushed the S&P 500 up 26.3% since March 11 through Tuesday's close, has a disturbingly familiar ring. Still, this rally looks less vulnerable to the vicious cycle of recent history.

In the market lows of October 2002 and March of this year, many companies -- indeed, entire sectors -- were being discounted as casualties of a postbubble economy, a long war in Iraq, additional terrorist strikes in the U.S. and management chicanery.

The sharp gains off the last two market bottoms -- dozens of stocks have doubled -- suggest a profound change in market expectations, in many cases, the difference between survival or not.

What's more, the recent rally is not built solely on technology shares, an important distinction from the surge that began Oct. 9 and lifted the S&P 500 29% before it fizzled six weeks later.

Has the bear market ended at last, or is this uptick yet one more delusion of a market rebound that has not yet arrived in full? This time around, the evidence for the bull case is strong.

"The character of this market has changed dramatically -- we are back from the brink," said Duncan Richardson, chief equity investment officer at Eaton Vance. "I don't like everything that's going up right now, but on balance, this is a market I like."

Beyond Tech

The current rally has significant changes from those that preceded it. The Oct. 9, 2002, rally peaked on Nov. 27, with more than 1 in 10 S&P 500 components logging gains of at least 75%. But that rally was confined almost completely to the tech sector. Among 51 index components with outsize gains, 37 were technology companies, such as Maxim Integrated Products(MXIM Quote) and Corning(GLW Quote). Market history suggests that the favorites of a previous bubble won't lead the next bull market -- but often do spark unsustainable bear market rallies.