We Still Haven't Escaped the Bear

Things have been looking up since the Bear StearnsBSC mess, with the major averages moving higher and raising hopes that the worst days of the credit crisis are finally behind us. But the stock market isn't out of the woods just yet, and it will take a lot more technical rebuilding to declare a final end to the bear market.

It's highly positive that we have built a sturdy base off the January low and made progress to the upside in the last five weeks. This is reflected in the market volatility index (VIX), which on Friday dipped under 20 for the first time in 2008. This "fear gauge" points to an easing of anxiety and a willingness of war-weary investors to take on additional risk.

But even though we have bounced firmly off deep lows, the right conditions still aren't in place to ignite a sustained bull run like the one we enjoyed between 2003 and 2007. In fact, there's a body of credible evidence to suggest that the broad market is vulnerable to another decline that drop prices back to, and possibly through, the first-quarter lows.

Let's take a close look at what's missing in this monthlong recovery effort. Hopefully, these absent elements will fall into place in the next few weeks and help nascent bull forces take firm control over this conflicted tape. On the flip side, these critical dimensions need to show up here and now, or else the rally effort could be doomed to failure.

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Monday's session was the 22nd trading day in a row of below-average volume on the SPDR TrustSPY and Powershares QQQ TrustQQQQ. This isn't good news, considering the market's dramatic gains over that period. Clearly, this shortfall points to public skepticism about the current uptrend.

There is also a self-limiting mechanic element at work in these limp numbers. Historically, the public deposits more capital into the stock market during the first quarter than at any other time during the year. But in 2008, huge sums flowed out of equities as investors moved money to safer havens during the credit convulsions.