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March 24, 2009

Straight talk

As I noted in the new issue email announcement yesterday, the past two weeks have been pretty dramatic. The S&P 500 rallied 23.5% from the low on March 6 through yesterday's close, the biggest 10-day gain since 1938.

Uh-oh. Did I say 1938? Because we all know some pretty crazy stuff happened with stocks in the 1930s.

Here's the deal, as plainly as I can put it. We all hope the bottom is in on this bear market. But bear markets are famous for these sorts of furious rallies, en route to further losses. Big bear market rallies are typically violent and exciting, keeping hope alive.

And as this great Barron's interview (which we linked to a month ago when investor emotion was 180 degrees the opposite of today) points out, the stock market had 6 rallies like this one (20% or more) between the 1929 peak and the eventual 1932 low. Each time, the gains were erased as the economy weakened further.

So just as we have often told you to take bad market news with a grain of salt, we'd suggest not getting too high based on the results of the past 10 days. Enjoy it, sure. We are! But don't pin your hopes on it.

There's certainly a chance this bear market put in its final low on March 6 (at the never-more-appropriate 666 level on the S&P 500). The fact that I'm seeing very, very few writers even willing to hint at that possibility is probably as positive an indicator as any.

But there's also a chance that this is just a bear market rally. If that's the case, giving back these recent gains could be potentially heartbreaking. Just the sort of pain that causes many investors to give up and sell. This late in the game, that could be a tragic mistake for some, which is actually one of the main points of this month's cover article.

If the market continues going up, everybody is happy. But if it comes back down, I want you to be prepared emotionally (the point of this post) and tactically (the point of this month's cover article). Hopefully the big gains of the past two weeks will make it a little easier to think objectively about your best course of action should the bear market resume.