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There is a big difference between strategy and tactics in the stock market, which too many investors fail to appreciate on a regular basis.

From a tactical perspective, one was right to expect a big rally in the stock market. After a record liquidation of stocks by hedge funds and mutual funds alike, the natural, steady buying that comes from pension funds and retirement accounts sooner or later produces a rally in the stock market. Combine that with economic stabilization -- the now-infamous green shoots -- and you get a 50%-plus rally in the S&P 500 off of the March lows. So far, so good.

Treasuries are rallying again
From a strategic perspective, one needs to differentiate between an economic stabilization and a V-shaped economic recovery; they are not one and the same. Back in January, I noted that Treasuries were selling off, and junk bonds were rallying. This is typically a sign that the economy is stabilizing as the yield spreads between risky and less-risky bonds narrow.

Since hitting 4% at one point in June, 10-year Treasury yields ended August at 3.4%. In my admittedly subjective opinion, a move below 3% would be a powerful signal that the deflationary forces have not been contained by the Fed. Everyone loves to hate these bonds and thinks that printing easily creates inflation, but looking at the Japanese example over the past 20 years, a busted banking system can invalidate the magic powers of the printing press for a long time. If you believe we still have a deflationary problem -- few other than this author do -- consider the iShares Barclays Treasury 20+Year Bond Fund (NYSE: TLT  ) .

Stocks out on a limb
Great investors like Paul Tudor Jones do not believe in the V-shaped recovery. I'm inclined to see it Jones' way. I don't see the U.S. going back to the debt-driven growth cycle that ended in 2007. While I have repeated the above one too many times, I figured out a way to test my theory by looking at the data from the back-to-school and the coming Christmas shopping seasons. Retail sales will be very telling about the possibility of final demand meeting the inventory rebound currently ongoing in the economy.

For the month ended Aug. 31, here's the sector-by-sector look at S&P 500 performance:





S&P 500
















Consumer Discretionary




Consumer Staples




Health Care








Information Technology




Telecommunications Services








Source: Standard & Poor's.

The S&P was up 3.4% in August, with financials leading the way up 12.9%. The banks are now solidly in the green for the year. With a very steep yield curve -- the difference between long-term and short-term interest rates is very wide -- normally I would be very bullish on bank stocks coming out of an ordinary recession.

But big banks stocks have run very far, and we still have many unresolved issues with commercial real estate. JPMorgan Chase (NYSE: JPM  ) is up from around $15 in March to $42 of late, Wells Fargo (NYSE: WFC  ) is up from $8 to $26 -- and those are high-quality banks. Low-quality banks like Citibank (NYSE: C  ) are up from under $1 to $5, while Bank of America (NYSE: BAC  ) , which was dragged down by its Merrill division, is up from $3 to $17.

I was of the opinion that things were not as bad as the market was suggesting back in March, and now I am of the opinion that things are not as good as the market is suggesting. If you feel that you have missed the boat in this rally, look into telecoms and utilities, down 5.7% and 0.4% respectively for the year. The dividends on both AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) (6.4% and 6.2%, respectively) are sustainable, while the stocks have done little this year. Yes, the landline business is bad, but fiber-optics and wireless will make up for it.

In my years as an investor, I've noticed that people get most excited about stocks after a big run-up, and most disenchanted near a major low. How many of you were aggressively looking to buy the market in March? Not many. Avoid the same mistake, and tread cautiously with the market at its current heights.

More on market issues:

Fool contributor Ivan Martchev does not own shares in any of the companies in this story. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.

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