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2.7%  Q1 GDP    4.57%  avg. 30-year mortgage     9.5%  Unemployment

The March rally is running out of steam

As you know from looking at your 401(k)s, things turned around when the markets bottomed March 9. A remarkable rally began that day that has resulted in at least 50 percent gains in the blue-chip Dow, the broader S&P 500 and the tech-heavy Nasdaq.

But now, things are slowing down. A lot. We may be nearing a top.

Step back a bit.

Stocks look so much better now than they did in March because they were so low then. The Dow topped out at 14,164 in October 2007 and it was downhill all the way since then to March, when the Dow bottomed at 6500.

When the Dow broke back up through 10,000 earlier this month, it marked a point: nearly halfway back to 14,164. And that was in a matter of only seven months.

No one has expected another 50 percent rally over the next six months. But the bulls expect continued growth. A clear look at the trend lines, however, should make one a little more bearish and lead investors to consider a broader range of investments, along with stocks, which are no longer cheap.

From March 9 to through yesterday (Oct. 26), the Dow rose a little more than 50 percent, the S&P 500 was up 58 percent and the runaway Nasdaq soared 70 percent.

Now, let's work backward from yesterday to illustrate the recent trends:

-- If you track back three months, from July 24 through yesterday, the Dow is up a little more than 8 percent, the S&P 500 is up about 9 percent and so is the Nasdaq.

-- If you track back two months, from Aug. 26 through yesterday, the Dow and the S&P 500 are both up a little less than 4 percent and the Nasdaq is up just less than 6 percent.

-- Finally, track back one month, from Sept. 25 through yesterday. The Dow and the S&P 500 are both up just more than 2 percent, while the Nasdaq is up about 2.5 percent.

Can you see what's happening? They're flattening, all three of them. If you project out through the rest of the year -- assuming no major events, good or bad -- the best we can expect is no more gains, but no more losses in stocks.

Why is this happening? Possibly because the stock market -- which is always about six months ahead of the economy -- is starting to sync up with an economy that has a 9.8 percent unemployment rate. And probably will for months ahead.

The recession is likely to technically be called over later this week, when third-quarter GDP is reported by the Fed and is predicted to turn positive. But unemployment has continued to rise for several months after each of the past recessions, and this recession -- which began in Dec. 2007 -- is unlike any over the past seven decades.

The stock market cannot continue its meteoric rise if the underlying economic fundamentals don't catch up, even the most bullish agree. That's why investment diversity -- bonds, cash, gold; heck, baseball cards, in addition to stocks -- is more important now than ever.

-- Frank Ahrens
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By Frank Ahrens  |  October 27, 2009; 4:28 PM ET
Categories:  The Ticker  | Tags: Dow Jones, nasdaq, s&p 500  
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