What the market is saying:

Buyers show interest as the major indexes come off lows.

Thursday’s traditional Follow Through Day (FTD) of an increase in buy-volume with the Nasdaq advancing 1.7% has us interested.

But according to IBD, the science has changed, and they are not calling for an FTD due to higher volatility in the market.

Without entering an academic debate over the subject, we trust IBD has done their homework and Thursday’s move isn’t as strong an indication as it once was.

But we still see Thursday’s accumulation as a positive.

After aggressive rate cuts by the Fed not seen for more than a decade, combined with an economic stimulus package from Congress, conditions couldn’t be more ripe for the rally to extend.

We’ve hoisted the Yellow Flag because we almost always give the Bull the benefit of the doubt. Just look major corrections of the 15%+ variety throughout history.

We also need to recognize that pessimism is coming off an extreme, which typically leads to a bounce.

But just how much gas the Bulls have is something to be seen. We’ll be just as quick to raise the Red or Green flag when the market tells us so.

The next test for the major indexes will be the 50-day moving averages, which they are now under.

The averages are often a magnet for price action to revert to, and how they handle these lines will be telling of their strength.

Bulls want to see selling volume drop off, this will be evident with down days happening on reduced volume.

We also want to see Leadership develop, which so far has been in Financials, Precious Metals, Home Builders and Transportation.

While it’s encouraging to see the Financials leading the pack, the total damage from bad loans made remains an uncertainty.

It’s not a stretch to see the recent boost in financials as the work of short-covering.

Market’s usually don’t handle these kinds of uncertainties well. This was the case with Enron’s accounting issues leading the market lower in the last Bear market.

With the exception of Transportation, the Leadership isn’t of the variety to back a new major leg up in the market.

We firmly believe the market ultimately goes where earnings go, which is why this earnings season will also be telling of the Bull’s ability to get back on track.

To the Bears argument, so far even good earnings reports are being sold. It’s never good when good news is rejected.