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Psst...Listen to Market "Tells"

The next several sessions are going to define what happens the rest of 2010, and now is not the time to be aggressive on either side of the tape.

In many ways, Wednesday was a breath-taking session. The S&P 500 SPX surged nearly 3% and, as has been the case so often this summer following a big rally, sentiment has shifted quickly from bearish to bullish.

This is interesting because, by all accounts, the SPX remains well below all of the major moving averages. These moving averages are trending lower. Volume has been unimpressive on rallies in general. Breadth, that is the number of stocks advancing versus those declining, has been lackluster. New highs are not expanding. And, as I suggested in my most recent Big Idea, the traditional market "tells", foreshadow more market weakness.

So, why does sentiment shift from bearish to bullish at the first sign of strength? That is easy; investors are hopeful and want to believe this time it is different. They want to believe that this time, slowing economic growth, both at home and abroad, will not matter. They want to believe seasonal factors like traditional weakness in the month of September, will not matter. In short, they want to believe the past is no indication of the future. Unfortunately, that is not so.

Although I have been very bearish, I wrote last week that an oversold rally from the SPX 1040 was very likely. Further, I suggested bears would concede a rally to SPX 1084 as they regrouped. Yesterday's near 3% surge for the SPX is what concession looks like. Still, that does not mean bears are in trouble. Indeed, it does not even mean they have lost the upper hand.

The next several sessions are going to define what happens the rest of this year. As I suggested last week, I look for bears to press hard in September, as companies guide earnings and revenue estimates lower and sovereign debt issues in Europe resurface.

Now is not the time to be aggressive on either side of the tape. Take a step back and just watch for a day or so. If bulls can get through SPX 1084, they will have a reasonably unobstructed shot at 1100. If they fail, you can expect that Wednesday's rally will be quickly forgotten and the larger decline will resume.

There are a number of stocks I really like from the long side. Issues like Chipotle Mexican Grill (CMG) - Get Chipotle Mexican Grill, Inc. Report, salesforce.com (CRM) - Get salesforce.com, inc. Report, Union Pacific (UNP) - Get Union Pacific Corporation Report and Cummins (CMI) - Get Cummins Inc. Report look wonderful, but I am going to resist the urge to get involved on the long side or initiate a bullish options position, at this time.

At the time of publication, Terry Bedford was long CMG shares.

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Terry is the Founder and President of Bedford & Associates Research Group. Terry writes for AOL Finance and MSN Money and is regularly quoted by the financial media.

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