Week Ahead in Stocks: This Bull remains Bullish

Volatile markets test traders convictions. If something different occurs, outside the daily rhythms of a market that have occurred historically, questions are asked about the viability of the given trading strategy a trader is employing as well as the level of conviction in using that said strategy. 2008 will go down as one of those years where everything was questioned and the basic premise of stock markets was tested. That premise: Stocks can actually go to zero. You see, in a bull market, very few companies actually trade to zero. If a company is in distress during a bull market, someone normally swoops in and buys them. On the other hand, in bear markets, stocks do indeed trade to distressed levels - just look at those busted dot.com's during the earlier part of this decade. However, in the end, there was value in their assets or their property (pets.com for example).

2008 has changed the rules of a bear market. It has taken companies, once considered the bedrock of the financial system, and put them under the bedrock, left with piles of liabilities on other companies balance sheets. Bear Stearns, a viable company for over 80 years, fell apart in a week. Lehman Bros tried to stay afloat but one speculative attack after another took them apart. Wachovia had a run on its bank and Washington Mutual had to be saved by JPM. Citibank a few weeks ago had a bailout from the good old US Government save them from "zero." Now there is talk that the CMBS market is having issues - combine that with a weak retail environment and you end up with yet another major real estate problem.

So how does one play this game? Well, in my stock portfolio, I am holding companies with good technicals and decent cash flow metrics, as well as some earnings. At the moment, my strategy is to buy the dips and sell the rips because we are in an environment where the uptrend is nowhere to be seen and the downtrend is quite intense. However, that does not say I am bearish at the moment. In fact, as I said last week, my view on the marketplace is a bullish one in terms of my outlook - till my premise is proven wrong (the lows of 770 hold). I continue to believe that the "rip" portion of the trade will be in the 925/950 level.

Intermediate to Long Term
The stock markets remain in a range I believe somewhere between 800/950. They remain plagued by weak earnings outlooks, a weak consumer and continued fixed income leverage issues. On a positive note, the markets lows appear to be in for the next few months so some stabilization in stocks could lead to stability in other markets as well. The elephant in the back of the room is the poor retail situation and in looking at traffic patterns in my area on Friday, I have to say that there will be some (or many) retailers remaining in the red heading into 2009. Some may even go out of business if the consumer completely retrenches.

So in total, the BB model remains on the bearish side. I would have my hedges lifted at this point but would not be going in full fledged into any asset at this point. Risk remains to the downside but even during a bear market, stocks do rally from time to time. I believe that we are currently residing in that "time" now.