As the third quarter gets underway, U.S. stocks posted their best quarterly gains since Q4 1998 following the Long Term Capital Management crisis. June, however, did witness some important price divergences for several sectors of the market suggesting this bear market rally is nothing more than a dead-cat bounce since March 9.

As pointed out almost daily by my favorite market maven, Richard Russell (Dow Theory Letters), the divergence between the Dow Jones Industrials and the Dow Jones Transportation Average was confirmed earlier in May and has failed to solidify this post-March uptrend. The Transports have recently broken down below important support levels. According to Dow Theory, both averages must hit new highs in order to confirm a new bull market; that hasn’t been the case over the last few months as the Transports remain down 8.6% this year. Rails, trucks, shipping and airlines usually precede a bull market – yet that’s not occurring in this rally.

Another important indicator failing to sustain a rally is the regional banks.

While the largest banks have successfully raised more than $50 billion dollars since April to boost their still battered balance sheets, the smaller banks in the United States, including many regional banks, have topped-out. The smallest lenders have tumbled 26% since hitting a four-month high on May 8. Many smaller banks don’t have sufficient capital to feel confident enough to boost lending while many others have returned TARP funds because of government restrictions tied to borrowing capital.

Then you’ve got the homebuilders – one of the worst casualties of this credit crash. Homebuilding stocks posted huge gains off the March lows but have since tanked 26% since hitting their highest levels since last October on May 4.

Concern that mortgage rates, credit losses and foreclosures are increasing spurred retreats in the companies forecast to be among the biggest beneficiaries of $12.8 trillion dollars in government stimulus spending. Despite massive government injections into housing and tax incentives, you can’t force someone to buy a home or refinance if job losses are mounting and foreclosures are rising.

Inflation worries – which typically accompany a cyclical economic recovery – are premature at this stage. The United States and the global economy are mired in a deep contraction in demand; virtually no company has pricing power since last year and margins are mostly being improved through aggressive company cost-cutting.

Major inflation gauges like gold and TIPS have indeed climbed in 2009 but remain well below their March 2008 and July 2008 highs, respectively. This price action doesn’t suggest an inflation panic anytime soon. The same is true for Dow Transportation Average – a highly cyclical barometer.