Despite Friday’s big 500-point surge, the Dow and all other U.S. indices remains hostage to the consequences of major technical damage inflicted last week. U.S. stocks broke important support levels starting on Thursday with equities touching 5 ½ year lows.

Bonds, a safe haven since last year, saw benchmark Treasury yields crack new multi-year or multi-decade lows. Ninety day bills, for example, now trade at just 0.04% -- the lowest such level since the 1930s.

The odds are quite high that any follow through this morning won’t last and investors will once again step up to the plate and sell stocks – just as they’ve done in previous rallies or bursts of buying. After breaching technical support last week, all major indices will retest those levels.

The market has completely lost control as signs of economic recession intensify amid plunging employment, rising bankruptcies, a busted credit system and weak loan demand from businesses and individuals. Making matters much worse, Treasury Secretary Paulson’s recent about-face on TARP (Troubled Asset Relief Program) is adding even more uncertainty about the government’s resolve to finally solve the toxic asset problem.

Over the last ten days I’ve also made a point for the contrarians, or investors looking at deep values in stocks despite the ongoing carnage. Value investors believe that equities offer fair value at these levels accompanied by the highest dividend yields in years. This positioning is normal, considering the S&P 500 Index is down almost 50% in 2008. Still, bargain-hunting has resulted in more pain for value investors over the last 16 months; every time stocks decline the proceeding rallies have occurred with less conviction, ultimately breaking down again and hitting new lows.

The Dow Jones Industrials hit a bear market low of 7,286 in October 2002. At current levels, the Dow is barely 700 points above that pivotal level. If you believe, as I do, that this recession will be a long and painful multi-year event then you must also subscribe to the view that we will re-test those October 2002 lows. Therefore, buying stocks even at these levels is not a wise investment decision. Investor confidence has been shattered and there’s no way a new bull market is about to begin with the macroeconomic outlook so poor and rapidly deteriorating.

If you must buy stocks then consider covering your exposure with a reverse index fund so you can at least break-even in this volatile environment if stocks collapse again. I would also remain very liquid with high cash levels.

Value investors are right to an extent. If you’re a long-term investor then the broader market is a good purchase now. But I imagine it would be a better idea to spread that buying over the next 12-36 months because the economy is deteriorating, not improving and investor confidence has been totally shattered following massive losses.

This is still a secular bear market, hostage to a credit environment that is largely fractured and only grudgingly improving. Be careful.