S&P 500 Rally Unconvincing

Thursday 8/23/07: The S&P 500 (I show the SPY depository receipts here) rallied about 10 points from its spike low of 137 set intraday during the panic sell-off last week, but has rallied only about up to its downtrend line. It has had some strong days, but the volume has been very weak on the upside, much less than on the downside, and you would expect snap-back rallies, some ferocious and impressive, even in a bear market. Note also that the market violated then rallied back to its 150 day moving average, which is now resistance. It breached the 150 day today then settled back to close down. The 20 day trailing high is approaching 150 which would be about the level where the bear thesis has to be seriously questioned, although in such a choppy, nervous market, some head fakes will no doubt keep everyone guessing.
The fundamental backdrop is not certainly terrible but is terribly uncertain. Valuation is average based on reported trailing earnings, but no doubt many of those will blow up going forward, contracting the E part of the PE ratio. This credit crunch is much more pervasive and serious than the LTCM debacle or the Asian currency meltdown and the market's decline has been dramatic but so far quite modest. We live in a country in which our government spends about a third more than it makes, including $12 billion a month in Iraq alone, and has to borrow a billion dollars a DAY to keep operating. Our currency has gotten a 20-30% haircut depending on what other currency you look at, meaning that the real spending power of all Americans has undergone an invisible bear market. Had the dollar remained constant against the Euro but the stock market lost a third of its value, every pundit would be bemoaning the financial crisis, but if the stock market was (until recently) making new nominal highs in a devalued currency, no one really notices.
Households are in poor shape, viewing their homes as ATMs and buying today what they really could not afford until tomorrow. I continue to believe that the bubble in equities never really popped; it was simply transferred into housing. Rising prices begat expectations of even more exponentially rising prices, and people apparently made marginal purchasing decisions based on this rising equity. Since over 2/3 of our economy is consumption, any massive slowdown in individual marginal spending because of the pain of the mortgage blow-up and resultant credit crunch could have very dire consequences. Eventually we, at the individual and government level, must pay our bills, but the adjustment although healthy long-term could be very painful short-term.
The Fed's pumping liquidity into the system so aggressively makes me think they understand things are worse than the public yet realizes. At any rate, the case for a sustained bull market in this environment is harder to make.