Tickers in this Article: SPY, XHB, ITB, GNW, FNM
The debate continues in the financial markets about whether the massive stock market rally has run its course, and there is considerable economic, technical and psychological evidence to make an argument on either side. This debate is merely a sideshow and investors should focus on individual stocks and not get bogged down on this polarizing debate.

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The market as measured by the S&P 500 SPDR's (NYSE:SPY) bottomed in March 2009 at $66.25 and has since rallied to around $103. Obviously, investors want to know whether we are in the early stages of a bull market or in a bear market, about to have our heads handed to us again. On the technical side, there are several indicators that show that the market is extremely overbought. The percentage of stocks trading above its 200 day moving average is at 91%, one of the highest levels ever, and close to the record set in 1986.

Some of the stocks trading far above its 200 day moving average has been given up for dead by the market. Fannie Mae (NYSE:FNM) is trading nearly 200% above that level, while Genworth Financial (NYSE:GNW) is trading about 160% above its 200 day moving average.

This doesn't mean that the market will fall immediately. Since momentum investing and trend following are one of the most potent forces in the market, they can keep moving the market higher for quite some time.

A psychological sign of a near term market peak may be seen in a recent survey of market optimism conducted by Investors Intelligence, which showed that the percentage of bullish stock advisors climbed to 51.6%. This was the highest reading since December 2007, and some pundits see this a contrarian indicator.

The Other Side of the Coin
On the flip side, there are also several arguments for a continued rally. There is increasing, albeit controversial evidence that the housing market may have bottomed for this cycle.

Sales of new homes were up by 9.6% in July 2009, the fourth consecutive increase. The percentage decline in housing prices is no longer increasing, and although it is still in the worrisome double-digit range, the trend has encouraged investors. The latest report showed a sequential increase in prices.

This has led to huge gains in the S&P Homebuilders SPDR (NYSE:XHB) and the Dow Jones US Home Construction iShares (NYSE:ITB), with both up 100% from its March trough.

There is evidence to support both sides of the debate on the future direction of the market, and perhaps investors should concentrate on finding solid but undervalued stocks rather than get involved in this contentious debate over the market direction. (Take a look at our article A Review of Past Recessions to learn what happened in previous downturns.)

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