Potential Bear Market Rally

I used to make a pretty good living sharing hard won market lessons with other people, and though I'm no longer in that particular business I still do like sharing lessons I have learned. Here's one I hope none of you ever have to use: If you happen to be in a situation where you must see an oncologist and she says something is going to hurt a lot, BELIEVE HER! If she offers you pain medication BEFORE the painful procedure even starts, don't think that your doing yourself any favors by trying to be conservative on the pain meds!
Speaking of pain meds, how about the market huh? After falling below 11,000 on the DOW for the first time in a few years on Tuesday, yesterday the market did an about face. The small cap index was up nearly 3 ½ %, the Nasdaq gained over 3% while the DOW and the S&P500 both put in gains of just over 2 ½ % on the day. More spectacular were gains in airlines, which gained 25%, regional banks gained 17% and the beaten down financials put up a 12% on the index alone. Well's Fargo (WFC) was up 30% on earnings. Where did this come from? Pretty simply that markets do not go in one direction forever, and bounces in bear markets tend to be the most violent of all bounces. In fact 8 of the 10 largest up days ever in market history have occurred in the middle of bear markets.
Do I feel bad for missing out on a lot of the moves yesterday? Well I certainly wish I could have had today's WSJ at about 7:30am yesterday morning, but on what day is that not the case? Because neither I nor anyone else has the ability to forecast the future (hell I don't even know what I'm having for breakfast yet and its already 7am, I'm not going to beat myself up too much over. If you look at the charts of key stocks that rallied yesterday you can see that a lot of them are some of the most beaten down names in the market, and its hard to find a point to buy those. At what point during the 70% decline it has seen in the last several weeks do you step in and catching falling swords with a stock like Fannie Mae for example? I don't, and thats the only way I know how to stay profitable.
For me profits start with losses, specifically keeping them in check. I keep losses in check by following my rules. If I don't follow my rules it would have been very easy to jump into the market after the strong accumulation day that we saw on July 8th, but with in a day that moved gave way to the downside again. There is simply no gain in that for me. I have always thought that a managers true value is shown when markets are not easy, and you can see how well does the person running my money do at holding on to it while everyone else is giving it up. While Anthony and I have not produced huge gains this year, we are up, and actually would rank in the top 5% of managers this year so far. I'll take those results.
Now, all the pooh poohing above not withstanding we do have a POTENTIAL rally to keep an eye out for. I would consider yesterday to be day two of an attempted rally (Consult Investors Business Daily for the definition). I will be watching very closely for a follow through day in the next several days, and should that occur I will be a buyer. Over the last several letters I've published I've talked about down markets being the best time to isolate the very strongest names, and should we get a follow through day thats exactly when I will put that list to work. Even though I think it will be nothing more than a bear market rally, if its catchable following the rules I'd still like to catch it – bear market rallies are the strongest rallies of all in most cases.
I'll get you a pretty long list of stocks either this evening or over the weekend. Good trading.