It is only mid-May, but already people are talking about putting on their rally caps. This kind of talk is usually reserved for much later in the baseball season, but we aren’t talking about baseball, are we?

Is it time for the market rally caps to go on? That’s the million-, or really trillion-dollar question. I'm not a soothsayer nor do I have a crystal ball. All I know is what I hear from associates, friends and adversaries in the market.

A lot of the people I talk to think this is just the beginning of a huge bear market. They see the housing slump, the current credit crisis and inflation continuing to restrain consumer spending. My bearish friends also look for problems with earnings through the end of the year. Even without the financial sector, they think earnings this year could be weaker than expected.

These bears point out that since early October the S&P 500 has had no less than six failing rallies. The Dow Jones Industrial Average, S&P Mid Caps and Russell 2000 have traced out similar chart patterns. They point this out as typical bear market action. It is also their belief that the market has not yet fully priced in the possibility of a nasty recession that takes longer than expected to get through.

Others I hear from have a different view of the situation. It is their opinion that we are close to, if not coming off of, the bottom and are headed towards new highs. The new highs they see are in 2009, after the new Presidential administration is in place, but those highs are on the way.

Since its October high, the market has fallen more than 17%, but since the March "bottom," stocks have added 9% plus to their value. This is obviously a rally, but rallies actually do take place in the course of bear markets.

Another point to consider is the breakthrough of the 1,400 resistance level for the S&P. This rally had failed to break through resistance at 1,400 several times but has recently made a strong push. Whether or not it can stay above and build support at that level is now the big question.

Look out for write downs in the financial sector. Credit card, auto loan and commercial loan defaults are climbing as the economy weakens. Just because write downs of mortgage-backed assets are over -- if they are -- it doesn't mean that investors are out of the woods. Watch for trouble in non-mortgage credit. If the write downs don't get out of hand, we may have seen the bottom.

Global economic growth has been fueling the market lately and this is an area to watch closely for signs of traction in this rally. Growth in economies such as China and India falling to zero is not very likely, but these economies do have the potential for significant slowing -- at least in the short term. This is another area for close supervision. The companies and sectors doing well now have a significant portion of their revenue from foreign sales. If this revenue source slows before the US economy fully recovers, we could be headed for more lows.

What happens next is up to you. Should you fall into the bear camp or run with the bulls, there are some plays that will work either way. The two sectors that have historically led market recoveries are technology and consumer discretionary stocks. Debit call spreads in these sectors could just be the trade to make right now. With decent downside protection in case of a further drop, you could still make a decent return in 60 days or so.

In the technology sector, there are a couple of promising plays to consider. Both F5 Networks Inc. (NASDAQ: FFIV, Stock Forum) and MEMC Electronic Materials Inc. (NYSE: WFR, Stock Forum) have seen their respective stock values decline, but both stocks appear to be stable and ready to move up.

FFIV provides technology that optimizes the delivery of network-based applications and the performance and availability of servers, data storage devices and other network resources. The stock hit a 52-week low in early April and has since been moving steadily up.

For a hedged trade on FFIV, look at the July 25/22.50 bear call spread for a $2.25 debit. That's an 13.6% return and the stock has to fall 13% to cause a problem.

WFR designs, manufactures and sells silicon wafers for the semiconductor industry worldwide. The stock fell below its 200-day moving average in late April. The stock, however, found support and has been generally trending up in the past few weeks.

When looking at WFR, you may want to consider the July 60/55 bear call spread for a $4.50 debit. That's an 11.1% return and the stock has to fall 16% to cause a problem.

There are also some stocks to watch but not put trades on quite yet. Google Inc. (NASDAQ: GOOG, Stock Forum), Research in Motion Ltd. (NASDAQ: RIMM, Stock Forum) and Apple Inc. (NASDAQ: AAPL, Stock Forum) are showing signs of being overvalued when compared to the market in general. These stocks could see a bigger drop should the market turn down in the coming weeks. For this reason, trades on these stocks would be best put off until any rally is more firmly entrenched.

As always, make sure any trade you enter meets your risk tolerance and profit goals. Don’t forget to have a little fun, too.

This week Investors Observer covers:

Has the market Bottomed? What can investors do?

Articles:
* Have Things Bottomed For Microsoft? Plus, Lee's Take On YHOO, HPQ, AMZN, EDS, and TM
* Time to Pick Up some Bargains?  
* Four Easy Ways to Play a Market Bottom

Click Here to read any of these articles.

Vic Wisemann
Lead Analyst

Vic Wisemann is an equity option strategy analyst with Investors Observer. Mr. Wiseman manages several portfolios for the company and comments weekly on his insights, strategies, and tactics for playing the market to win.

DISCLOSURE: Mr. Wisemann owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he discusses in his articles.