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The question on most investors’ minds right now is whether this rally is for real or if it’s just a temporary respite within a longer-term downtrend.

The rally has legs. I suspect we’ll see the S&P 500 continue its climb for at least another month, probably running back to the 950 to 1,000 level. However, as I’ve often written lately, I seriously doubt we’re looking at a straight line higher from here. Those looking for a quick return to the bull market days leading up to the 2007 top are likely to be sorely disappointed.

There are tentative signs of a US economic recovery, or at least stabilization. The fourth quarter of 2008 or the first quarter of 2009 likely marked the trough of this recession. Although this doesn’t mean the US economy will start growing, it’s unlikely to continue shrinking at a 6-percent-plus pace for the balance of this year.

Longtime readers know I follow the Conference Board’s Index of US Leading Economic Indicators (LEI) closely. Each month I present a detailed analysis of LEI, including its 10 constituent indicators. For my most recent analysis, check out the March 20, 2009 issue. 

The LEI is only released monthly, but many of the constituent indicators are reported ahead of time. Some will be sharply positive for March. For example, the stock market saw an outstanding run in the month of March, climbing about 20 percent. Because that’s a component of LEI it will drive the indicator higher.

In addition, recent reports on durable goods suggest stabilization in other parts of the economy. Even today’s jobless claims data, while far from a bullish report, suggests that the pace of job losses is no longer accelerating. All these points suggest that we will see a nice bump higher in March LEI when the number is reported on April 20. With the market trading at such depressed levels, even less bad news is good news.

And value investing legend Benjamin Graham once said, “In the short run the market is a voting machine, in the long run it’s a weighing machine.” This is why it’s important to pay attention to more technical indicators when gauging short-term market movement. On this score, I also see some signs of life; check out my chart below.

Source: StockCharts.com

This chart shows the number of stocks trading on the New York Stock Exchange (NYSE) hitting new 52-week highs minus the number of stocks hitting new 52-week lows. During market declines, it’s typical that this indicator will register a large negative number; this just means that a large number of stocks are hitting new lows and only a handful are hitting new highs.

As you can see, the indicator touched about -2,500 back in early October as the credit crunch intensified and Congress dithered on the $700 billion Troubled Asset Relief Program (TARP). Although the S&P 500 made a new low in late November, the intensity of the selling appeared to abate. The indicator bottomed out at less than -1,500, well above its October lows.

After a brief year-end rally fizzled out in early January, the market once again plunged, breaking its November lows and touching the 665 area. Yet, while this was a significant technical breakdown, the selling intensity moderated yet again and this indicator bottomed out around -800.