We've suffered through a curious bout of bottom-calling in the last six weeks, but price action still doesn't point to

the final demise of this bear market

. The

S&P 500

index has risen just 6.8% through the period, a feeble uptick compared to the 13.1% recovery during an identical number of trading days after the

Bear Stearns

low in March.

It's even worse on the Nasdaq 100 (NDX), which posted nearly 20% gains after the March low. This time around, it's barely scraped together a 6.5% rally. The performance alignment between this index and the S&P 500 exposes yet another weakness in this recovery attempt. Neither average has taken firm hold of the leadership reins.

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The lack of strong and consistent leadership is the main reason we're stuck firmly in the first bear market since 2002. Sadly, market players don't seem too interested in blue-chip or big-cap tech stocks right now. Instead, they've turned their attention to beaten-down sectors that posted the most frightening losses after the October 2007 top.

It's good news that banks, brokers and homebuilders have jumped sharply in the last six weeks, but as counterintuitive as it may sound, these noxious groups can't lead the broad market to higher ground. This type of heavy lifting has to come from the core constituencies that historically fill the majority of long-term portfolios.

We should also recognize the influence of short crowding in these narrowly based rallies. There are few deep pockets in these frantically algorithmic market venues. However, there are plenty of short-sellers flipping through their charts and drooling over the precarious positions of stocks linked to the mortgage mess.

These folks jump in boldly, not recognizing the dangers posed by the brutal algorithms pushing these issues through their daily paces. The rapid-fire price movement generates enormous volume by eating up their stops, with real directional movement taking place through overnight gaps or sharp reversals after short-term range expansion.

KBW Banking Index (BKX)

Click here for larger image.

Source: eSignal

Logically, the real test for the banks won't come until the KBW Banking Index (BKX) rallies into the trend line created by the lower highs posted since early 2007. Note how the downsloping line corresponds with the triple lows broken in May. Simply stated, the recovery effort means nothing until the index rallies above that critical resistance level.

By "nothing," I mean don't put a single exposed bank into your portfolio until we see that breakout, because the group remains highly vulnerable to a deep pullback. Yes, I still believe the July index low will hold, but that isn't the same thing as a buy signal. Seriously, these stocks can go nowhere for years and never touch that deep price again.

Amex Securities Broker-Dealer Index (XBD)

Click here for larger image.

Source: eSignal

The Amex Securities Broker-Dealer Index (XBD) has carved out the same broad strokes as the banking index, but its technical improvement is more obvious to the naked eye. In particular, price is now trading above the lows broken in the first quarter. On the flip side, the index has made no progress at all since July 23, when it topped out at 164.50.

In a nutshell, it's déjà vu all over again. Remember the bottom-calling scramble after the August 2007 selloff? How about the table-pounding after the January decline and March tumble? In each case, a core cadre of talking heads was absolutely certain the final low tick of the financial debacle had been printed, mailed and delivered to an eager public.

In reality, price action since July looks just like the flameouts we saw after those false bottoms. So how can anyone in his right mind assume it will be different this time around? And how can anyone, crazy or otherwise, ask war-weary investors to throw away more money betting that

Merrill

(MER)

,

Morgan

(MS) - Get Report

or

Lehman

(LEH)

have finally turned the corner?

Phlx Housing Sector Index (HGX)

Click here for larger image.

Source: eSignal

Finally, look at this weekly chart of the Phlx Housing Sector Index (HGX). Do you see a strong pattern, or a weak one? Do you see a buying opportunity, or an accident waiting to happen? Honestly, there's no compelling reason to buy the homebuilders after looking at this depressing graphic. That said, the group looks a tad better than banks or brokers.

I'm encouraged by the index remounting the broken low at 118. But the victory is just a baby step, and we need a lot more evidence before trusting the sector's long-term upside. At a minimum, I'd like to see the recovery effort continue and terminate the long string of lower highs. That technical event requires a solid thrust into the February high at 160.

Of course, banks, brokers and homebuilders have attracted a deluge of bottom-fishing capital since the July low. But honestly, how far has that dangerous strategy taken you in this painful bear market? A far better plan is to protect your capital now and wait until those sectors finally pound out lasting bottoms.

Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.

At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Farley is also the author of

The Daily Swing Trade

, a premium product that outlines his charts and analysis. Farley has also been featured in

Barron's

,

SmartMoney

,

Tech Week

,

Active Trader

,

MoneyCentral

,

Technical Investor

,

Bridge Trader

and

Online Investor

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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