To understand I have to go back to the summer of 2008. The chart below highlights the main events over the past 2 and a half years. In August 2008 many analysts called an end to the bear market. Indeed the Federal Reserve tried to reassure markets by announcing that the housing crisis was contained. At this point there was no mention of a credit crisis or European Debt problem. 6 weeks later on Sep 15 Lehman Brother's collapsed, putting in place the collapse of markets worldwide. By Oct 2008 when Warren Buffet released his "Buy American. I Am" opinion piece, the market was fallen to 741.02 and a few months later in Feb to Mar 2009 the S&P reached 666.79 losing almost 50% from the Lehman Collapse.   

Many analysts called for the S&P to probably reach 400 before the end would be in sight. Instead by May 1 2010 the market had recovered to just before the Lehman Brother's Collapse. This was the easy money. Selling naked puts and holding stock and selling out of the money covered calls provided spectacular returns. Now at a high of 1205, again Analysts weighed in with everything from Hindenburg Omens to Death Crosses to tell investors to get out.

Just a few days  ago the S&P had recovered to the July to August 2008 heights. In my opinion the easy part of this rally is over. Certainly I believe another 10% to 15% could be achieved but let's look at the below chart. In October 2007 the S&P hit a high of 1576.09 before pulling back. For most of 2008 before the collapse in September, the market was range bound between 1300 to 1450. I believe the market today at 1344.07 marks a return to pre-collapse level and back to the range bound period BEFORE the collapse of fall 2008. Simply put, we are just back to where we were when the market was stuck waiting for higher earnings and "better times" to push the market beyond the Oct 2007 high. Can we get there? I have my doubts. Let's move to the next chart to see why.

Below you can see the last chart. It shows the past decade or so on the S&P. We have a very classic looking market. Two all time highs and then selling and a new bear market. My prediction is we may reach into the low to mid 1400's twice this year and then a sideways to move down going into 2012. Below the chart are my reasons why:

• The move up from 1995 to the high in 2000 was a growth period for the economies of the world in general. True to economic growth, by the turn of the decade in 2000 the market had reached exuberant status and therefore pushed it into the mid 1500's.

• This was a period of true growth in the economy and in corporations in general within the market (aside from the dot.com bubble which is another story altogether). Annually stocks made gains based on those earnings.

• After 9/11 the Federal Reserve eased monetary policy and the economy in October 2002, turned and on low interest rates the economy picked up steam, in particular housing. Financial institutions expanded beyond their normal role as lenders and profits (whether actual or not) seemed to support valuations. With this easy money came a lot of growth within corporations.

• TODAY:

• Debt loads are truly staggering both personal, state, national.

• These debt loads are not limited to the United States but are world wide.

• The housing market has yet to recover.

• European nations like Greece and Ireland could very possibly default on their long term debts.

• Unemployment is higher than normal and remains stubbornly high.

• The Federal Reserve has held interest rates at or near zero for more than two years.

• The Federal Reserve has pumped hundreds of billions into the market and economy.

• POSITIVE TRENDS:

• On the positive front many corporations have rebounded in earnings.

• Many corporations have refinanced at ultra low levels.

• Many of these same corporations have refinanced for extended periods, some as much as 100 years but many for 30 years at very low interest rates.

• The Federal Reserve has held interest rates at or near zero for more than two years.

• The Federal Reserve is pumping in hundreds of billions of dollars, supporting stocks and riskier assets.

Based on the above, it is true that the market could continue to climb (not straight up) and even surpass 1500 on the S&P, but a lot of this could again be caused by the very real concern among investors that there is very little place to "park" their capital and earn more than 1%. This brings many of them back into risky assets like stocks, which I believe is part of the Federal Reserve's plan. The collapse of stocks in 2008 and again in 2002 wiped out a lot of investors including seasoned ones. Pension plans which are heavily invested in risky assets simply because of returns on investments during this period of very low interest rates, saw large losses in both downturns. I believe the Federal Reserve is concerned about the retirement benefits of millions of Americans which are tied directly to risky assets. As well this period of very low interest rates would also seem to suggest that there is a real possibility of deflation. Last year there was a lot of talk about deflation, but this year (2011) that talk seems to have abated. Personally I believe deflation remains the greater threat. As well the problems of excessive debt both personal and by countries worldwide are a real issue that still could derail the economy at some point. The Federal Reserve has indicated that by June they expect to end Quantitative Easing - The Sequel. That could be a tough month for investors.

Therefore based on the above, I believe it is important to remain cautious as the market has reclaimed much of what was lost in the Oct 08 to Mar 09 downturn. The best I hope for is a sideways market, but I believe that the first sign of European sovereign debt issues or climbing oil prices could easily turn the market around. I do not though believe the market can collapse back to the March lows over the next few months, as earnings have remained strong for corporations, which seems to be the only real bright spot in the economy. I am staying with large cap, blue chip stocks and you can read the rest of my strategy in the other article "The Cautious Bull"