Prelude to a Rally

The beneficial influence of fire in nature and the market has long been recognized. Certain species of pine trees will only shed their seeds if fire passes through. By clearing out the underbrush, the stage is set for pines and other good trees -- and stocks -- to climb.

Fire has been raging through the stock market for the past six weeks. The Dow Jones Industrial Average closed Friday below 10,000 for the first time in 10 months, down 16% from its 2000 high. Of the 88 industry groups in the Standard & Poor's 500, shoes, containers, engineering and construction, hotels, retailers and life insurers are down 33% or more in the first two months of the year. The six consecutive Friday declines in the S&P 500, culminating in the 17-point drop last Friday, have been distressing, particularly with the very volatile employment number scheduled for release at the end of this week.

Certain analysts are noting that there's some real pain out there, and other analysts who have been on the wrong side of 95% of the moves in stocks over the past 10 years are now bearish again.

The pine trees may be ready to grow, though. Recall that in 1999, the S&P gained 21% and bonds lost 13%, a divergence of 35 percentage points. ...