Emotions are a drug that intoxicates asset prices. The dosage varies over time. On Tuesday, the market was less pessimistic as the S&P 500 rallied.

Although the index closed ever-closer to its previous intraday high of 930.17 on May 8, there were a pretty decent number of stocks that were unchanged from the previous week. So there's still a lot of indecision remaining.

In times like these, bullish moves tend to be very aggressive but don't amount to much over the longer term.

Until that 930 level is breached on heavy volume and sentiment is strong enough to show a clear change in leadership, we're still in rather speculative times. And until indicators show more positive signs, a new secular bull market could be more than a year away.

In the more immediate future (the next one-to-three months), the S&P 500 seems to be setting up for a double-digit percentage fall. (See specific details in the "Where Are We Now?" section of this column below.)

Any really concrete new leadership in this cycle should come from more growth-oriented names, so watch the Nasdaq 100. When that really jumps significantly and holds its gains, a recovery with legs will be more in the cards.

Breaking Down The Latest Rally

In the meantime, remember, emotions are the "animal spirits" identified by economist John Maynard Keynes in his 1936 book "The General Theory of Employment, Interest and Money."

Keynes himself was a trader (mostly commodities) who built much of his wealth from buying equities in 1933. A new book "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism" by George A. Akerlof and Robert J. Shiller reviews the emotional ties between economic trends and asset prices.

Akerlof and Shiller show how emotions/politics infect economic trends by convoluting fundamentals in a feedback loop that precipitates booms and busts.

Judging Asset Price Trends

Technical analysis (TA) guides our insight on asset price trends. Eventually, fundamentals determine market direction. Consequently, TA is not a stand-alone tool for building investment strategies. But TA enabled us to identify a likely rally from 757 on March 13 into the 850-950 price range for the S&P 500 ($SPX, Figure 1).

FIGURE 1

FIGURE 2

Figure 1 employed a 12-month S&P 500 price-trend channel and the $NYAD or net advancing minus declining issues on the New York Stock Exchange (NYSE) in support of this view. Figure 2 compared the relative performance of the Nasdaq 100 to the S&P 500 ($NDX returns divided by $SPX returns) to spot the potential for a bottom in the market's decline since its October 2007 high near 1576.

1 | 2 | 3 |