The most

widely expected setback in recent memory got underway this morning, with the

Dow Industrials

recently down 1.24%, the

S&P 500

off 1.99% and the

Nasdaq Composite

lower by 3.61%.

Against this backdrop, I wanted to

surf the brain waves of a Chicago-based money manager, who shall remain nameless for the purposes of this exercise. Culled from an email the manager sent to his clients at the beginning of the week is a list of reasons why a new bull market may well be underway (updated to reflect recent developments), including:

  • Healthy volume on up days and other technical factors, including Birinyi Associates reporting more stocks under "accumulation" (i.e., being bought by institutions) than at any time since late 1999.
  • The bond market indicating economic recovery, via the steepening of the yield curve and tightening credit spreads. (However, a trader emailed Thursday to report: "Credit spreads, after a great month, are a good deal wider this morning.")
  • Consumer spending holding up well, evidenced by Monday's report that spending rose 0.3% in March plus last Friday's stronger-than-expected GDP report. (However, today's jobless claims and Challenger Gray layoff reports have redoubled concerns over how long the consumer can keep spending.)
  • Signs of life in the IPO market, glaringly evident in Simplex Solutions' (SPLX) offering yesterday.
  • The Bush Administration's policies, highlighted by this week's budget accord and accompanying $1.35 trillion in tax cuts.
  • Supportive Federal Reserve policies, which are expected to continue. Fed fund futures today are pricing in a better-than 50% chance of a 50-basis-point rate cut at the FOMC's May 15 meeting.

The manager was heavily weighted in tech stocks in recent years and remains long

Micron

(MU) - Get Report

,

Dell

(DELL) - Get Report

,

Cisco

(CSCO) - Get Report

,

Oracle

(ORCL) - Get Report

,

Nokia

(NOK) - Get Report

and

EMC

(EMC)

(among others).

But after stubbornly sticking with tech last year and in early 2001 (we had heated email debates in which he defiantly declared that the group would revive), he has more recently conceded "it's a different market." Lately, the manager has shifted his sector bias to include more retailers such as

Target

(TGT) - Get Report

, financials

Goldman Sachs

(GS) - Get Report

and

Lehman Brothers

(LEH)

, and cyclical stocks, including

Alcoa

(AA) - Get Report

.

One observation he made about this year is that there has been an emphasis on lower-multiple stocks within sectors, usually to the detriment of the biggest market-cap name in a given group. For example, he noted that Target has bested

Wal-Mart

(WMT) - Get Report

this year, while

Lowe's

(LOW) - Get Report

has outperformed

Home Depot

(HD) - Get Report

.

While generally optimistic about equities, the manager's email also listed reasons why what has just occurred may be another bear market rally, including:

  • Still deteriorating trends in earnings, particularly in the tech and manufacturing sectors, which combined make up about 30% of the S&P 500.
  • Too rapid a revival of bullish sentiment. "We need to see individual investors just hate stocks, and hate them for a while," he wrote. After record redemptions from equity mutual funds in March, early indications suggest that investors started returning to stocks in April.
  • Technical factors, including the fact that only the Dow has recently moved above its 20-day moving average and achieved positive year-to-date returns.

There are several other factors that could be added to that list, including ongoing concerns about the economy and renewed speculation taking erstwhile highfliers back to egregious valuations.

In a follow-up interview, the fund manager confessed confusion over which scenario -- new bull market or bear market rally -- will hold sway. His lack of conviction in the former is shared by many on Wall Street, and explains why so few fund managers are willing to step into the decline.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.