Stocks have floated languidly this week like paper airplanes looking for a place to land. Pushed gently this way and that by little breezes of news, the indexes have mostly finished with their noses slightly tilted in the air, which counts as a small victory.

Leaders are energy, materials and utilities, while laggards were REITS, autoparts makers and regional banks. Three times this week, the market actually rose by 0.5% to 1%, which seemed like a lot.

In a normal year, a 0.5% advance would be counted as an unexceptionally positive day, and we wouldn’t think anything of it. That’s pretty much what the market is supposed to do most of the time.

But just in case you have forgotten how awesome a 0.5% rally really is, I ran some numbers in Excel to provide some perspective.

It turns out that, due to the magic of compounding, if the market rose 0.5% every trading day for a month, it would be up 9.9%.

If it were up 0.5% every day from the start of the year, you would double you money by the end of July.

Very cool. Of course, that’s not going to happen, but it reminds us that if you string a bunch of 0.5% days together, great things happen. And the problem with bear markets is that it’s rare to string together any up days at all.

Stocks can’t get any traction, and the longer that they don’t the more shareholders feel anxious and decide to sell.

It’s important to keep in mind that this is still the bulls’ game to lose. The first four months of the year are typically among the strongest for the market, from a seasonal point of view.

So if stocks don’t make their strides much higher now, they don’t have much to lean on when sentiment begins to weigh on them in the summer and autumn months.

Moving Sideways

While bulls have not been able to take advantage of the pessimistic sentiment to create a massive short squeeze, neither have bears been able to take advantage of the stalemate and force stocks lower. So for now we remain in a holding pattern within a range, a condition that’s great for traders but not so great for long-term holders.

If you want to keep score at home, bulls need a breakout above the 885 level of the S&P 500 and need to hold that level for a week. Bears need a breakout below the 804 level, and they need to hold it for a week.

It’s like a football game where the two sides keep going four-and-out, and punting the ball back and forth between their respective 35-yard lines.

Economy Getting Worse

In the meantime, we really can say that the economy is materially worsening. Something like 50,000 new layoffs were announced between Friday and today, with many coming in some of the sectors that were supposed to be in for a big boost from infrastructure spending, such as Caterpillar (CAT), maker of land-moving equipment, and Texas Instruments (TXN), which makes chips used heavily in the broadband communication business. (See also: Will Obama’s Infrastructure Plan Save Caterpillar?)

Unemployment is a lagging indicator of the economy, as we well know, and will keep rising well after the recession is over as companies right-size themselves for future profitability. But before that happens, it’s a huge negative because of the way it dampens consumer spending.

American Express Feels the Pain

In that context I was struck by the earnings report of American Express (AXP) this week. Its executives said that this is the worst market for its product in decades as it depends so much on travel and high-end retail.

AXP said that the TARP money it had received after turning itself into a bank holding company was put to good use, and will help them extend money to customers. However becoming a BHC was a negative in that it makes them account for charge offs more aggressively.

From a practical standpoint, business was bad because average card spending was down 14% year over year, as card members are spending less with each transaction.

AXP shares rallied a touch the next day, but they have truly been pounded in the past six months, and are now down 56% from September 1, as well as well below their November lows. AXP has a lot of cash, around $13 billion according to execs, so it’s not going broke. But its growth model is seriously in jeopardy, so that is what the market is adjusting to.

Many other financial companies were hit very hard this week, including some super-regional banks that had not suffered much before. This just goes to show that it doesn’t matter if you didn’t do sub-prime loans anymore.

What matters is that you are interconnected to the overall environment through lending, and now we are just starting to see the normal sort of defaults witnessed during recessions.

US Bancorp (USB), which had been held up as a model bank most of last year, is now down 47% already in 2009 after sinking another 11% today.

Financials Need to Lead the Way…Don’t Hold Your Breath

This brings up a very important question: Can the market rally if the financials are weak?

I checked with some experts at Royal Bank of Canada, and they said that from the perspective of 30 years of data there has never been a major, sustainable up-cycle in stocks while financials have declined. In fact, they said, since World War II, no major up cycle has begun without early leadership by financials from the lows.

Starting in late November, a rally window did open and financials did lead, but it petered out quite quickly. RBC analysts conclude that the current rally is thus just characteristic of a recovery rally in an ongoing bear market and nothing more. And they say the broad market cannot possibly get going until the financials get up off the mat, although some individual groups, such as energy or materials, could make their own private moves higher. That’s a big statement, so take heed.

This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.