It will be difficult to ignore the sentiment…

As the old Wall Street saying goes, the market will do whatever it must to fool the majority.

That’s just another way of saying that investor sentiment is always extremely bullish at market tops, just prior to significant declines, and extremely bearish at market bottoms just prior to significant rallies.

This rally has been yet another example of that long history. Investor sentiment was at a record level of bearishness and fear just days prior to the rally beginning, which was one of the factors (along with the market’s extreme oversold condition) that helped us predict the rally and position subscribers for it.

While the fear and bearishness has diminished, it has not gone away, has certainly not reached the opposite extreme of bullishness and confidence that would be expected before a rally ends. So as I also said in last week’s column, the rally should have room to continue.

For instance, this week’s poll of its members by the American Association of Individual Investors (which was at a record level of 70% bearish, only 19% bullish just a few days before the rally began), is still 44% bearish, only 36% bullish.

Obviously, many investors are still non-believers in the rally. Before the next top is in, we normally expect to see investor sentiment reversed to the opposite extreme, where bullishness would be above 55%. Until then, their slowly increasing bullishness and confidence is providing additional fuel for the rally.

Sentiment regarding the economy is also shifting.

As late as last fall, the majority of economists, and even Fed Chairman Bernanke, were still saying the economy would only slow some, but not all the way into recession. Then last winter they had to admit that a recession had actually begun in December, 2007.

And sure enough the majority opinion then swung to the opposite extreme, that not only was there a recession but that it was in danger of plunging all the way into the next ‘Great Depression’.

But now, with the improvement in economic reports, the improved outlook expressed by the managements of a number of financial institutions, and the encouragement of the stock market rally, talk of the economy continuing to plunge into the next Great Depression is being rapidly replaced with hope that the economy has bottomed and recovery is already underway.

Anything is possible. But so far anyway I have seen nothing to change my long-term predictions.

In early 2007, I predicted that by the end of 2007 the economy would be in its most severe recession since that of 1973-74, a recession that would last until 2010 – but not a depression. I predicted it would be accompanied by a severe bear market that would not end until the first or second year of the next Four-Year Presidential Cycle, probably the second year, which would also be 2010.

Those predictions helped us navigate last year’s severe market decline, with our Market-Timing Strategy portfolio up 9.2% for the year, in one of the worst bear market years on record.

We also have seen nothing to change our shorter-term prediction that this rally would be significant and well worth going after, but would be a bear market rally, with the bear to resume in the market’s unfavorable season, and profits then to be made from the downside again.

However, a resumption of the bear market does not necessarily mean that the market will see new lows.

So far this market has not seen a successful retest of a low. A resumption of the bear market in the unfavorable season that only takes it down to a successful test of the early March low would be a significantly bullish event, which could well mark the final end of the bear market, and the beginning of the next bull market later this year rather than next year.

Meanwhile, enjoy the continuing rally. But just as I told you six weeks ago to be prepared for a significant rally, so I say now, the rally will end at some point, hopefully not for several weeks, maybe not for a month or two. And then it will be difficult to ignore the very bullish sentiment that will likely be in place at the time, which will convince the majority that it’s not a time to sell, but a time to buy and hold.