INVESTING: Don’t believe the optimists who say worst is behind us

The Federal Reserve saved the day, right? That’s what everyone is telling me. The Bear Sterns bailout in the middle of March put the bottom on this market, and while it may not be sunny skies right away, the worst is without a doubt behind us.

If the middle of March was the beginning of a bull market, then pigs really do fly!

Sometimes the stock market takes on the tone of a battlefield. A lot of noise and confusion and heroes trying to step up and take their shot at glory. Yes, heroes emerge. But the body count of the ones who don’t make it piles high. For the last six months, I have heard an endless call to buy financials. And for the last six months, I have ignored these calls. The financials just hit a new relative-strength low this week. They’re still garbage! The heroic move is to stay away, because it looks as if they will lead the next leg down beginning in a month or two, and the losses could be large, again!

Despite the fact that so many people are claiming March 17 was the low, I don’t believe it. Go back and look at every bearmarket bottom in the last 100 years. The stuff that led the previous bull market is typically the stuff that gets hammered the most. Then, at the end of the bear, you don’t hear anyone talking about buying that stuff. All you have to do is go back to March 2003, when the last bear market ended. Tech was a four-letter word on Wall Street.

My kids like to look at this book at home called “Where’s Waldo.” There is a lot of action all over the page, and you have to look hard to find Waldo. It is the same with volume right now. The fuel that bull markets are built on is missing in action. You can’t have a sustainable multiyear move (and bull markets last an average of four years) without rising volume as prices go higher. The lack of volume is another reason I do not believe we are in the early stages of a breakout move to the upside.

In the early stages of bull markets, just about everything moves higher. The previous bear market did its job of decimating almost everything in its path, and investors are finding bargains everywhere they look. Have you seen an advance/ decline line lately? The lines for every major index have barely budged since the middle of March. A month into this supposed new bull market, participation is already paper thin. That is not the way a bull market gets kicked off.

Instead of a new bull market, we have a rally that is similar to several dozen other bear-market rallies that have occurred in the past. Bear-market rallies can look spectacular from a distance, but it is best to keep your distance. In 2001 and 2002, there were four rallies that took the S&P 500 up more than 20 percent, only to hit fresh lows within five months every time. The best-case scenario for today is that the market revisits the lows of last month. More likely, however, is a lower level. Either way, staying defensive is still the best strategy.