What'cha Gonna Do Now, Mr. Ricochet?

Several times over the past few days, people have asked me if I thought the stock market had hit bottom, and was set to rebound. I don't think that they were asking me because they think I have any expertise on the matter. Rather, there seem to be a lot of people wandering around like zombies, asking anyone they come across, "When will it end? Have we reached bottom yet?"

It's certainly difficult to tell, isn't it? After the gloom of a week ago, here comes the promise of additional government intervention, including direct ownership stakes in banks (that'll be an entirely separate post, eventually), and voila!, the market surges 11% on Monday. An 11% upward move in one day! Clearly, the bear has been slain, and the market is on its way to making us forget that all the bad stuff has ever happened. Then, just as we thought it was safe to go back into the water, the market plummets on Wednesday, giving up the bulk of Monday's gains.

As an aside, it's interesting -- and not very surprising -- that we've seen the word "plummet" used so often lately in financial news headlines. Here are some other words and phrases that the media has had to dust off lately:

* Bailout
* Meltdown
* Cataclysm (a personal favorite)
* Gut-wrenching
* Worst (fill in the blank) since the Great Depression

I'm planning on using that last phrase a whole lot more often, whether or not it makes sense. For example, I was looking at the shoes I'm wearing today, and they could really use a good shine. Why, they probably haven't been this dusty since the Great Depression! I know, that's pretty lame. It's probably the lamest thing you've read since...(you got it)...the Great Depression.

You should all try this. Anytime you make a statement that indicates that something hasn't happened in a long time, say "since the Great Depression." It's great fun, and who knows, someone might overhear you, and offer you a job at the Wall Street Journal.

Returning to the markets (aren't you thrilled? Back to the exciting stuff!), yesterday, bleak economic news caused the market to sink in the morning, before staging a strong rebound in the afternoon, with the S&P 500 closing up 4.3% for the day. At its low point, the S&P 500 had been down 4.6%. The intraday volatility we've seen lately has been breathtaking. From the market's recent performance, it appears as though no one knows where we go from here.

I should just shrug my shoulders and say "Dunno." (For those of you who are a bit less hip and "street" than MBB, that means "I don't know, my old bean. I haven't got the answer to that one, good chap.").

However, the zombies continue to march forward, demanding answers. In my never-ending quest to assist the living dead (lest they feast on my flesh...I watched way too many low-budget horror movies when I was younger), let me offer my two cents:

We're not at the bottom of this move yet. For some reason, I can't seem to shake the nagging feeling that the current stock market decline will not be arrested until we at least test the S&P 500's October 2002 lows, although I certainly hope I'm wrong. Considering that the low closing price of the Index was around 775, we probably have another 18% to go from where we closed yesterday. It could be a little while. Then again, the way things are going, we could get there by the middle of next week.

(I paused for a moment to shudder).

This chart illustrates where we've been over the past 10 years, from October 1998 to today. (If you don't get a chart covering the past 10 years, go to the bottom right-hand corner of the chart, and enter a new date into the first box. The second box should show today's date). Note the October 2002 lows, which represented the low point of the post 9/11 move, and represented the base off of which the most recent bull market was founded. Also look at the far right side of the chart, representing the recent moves in the S&P 500 Index. It's nearly a straight line down. We've fallen off the cliff. That's what a crash looks like. There are some other periods over the past 10 years that have witnessed that kind of a decline, such as the 45%+ drop in the S&P 500 from mid 2000 to late-2002. But, that move took place over a period of over 2 years. For the Index to drop over 20% in a couple of weeks -- and nearly 30% in about a month -- is stunning.

Scary times, indeed.

In my opinion, it's not time to buy...yet. There will be a whole lot more volatility, which always gives rise to day-trading opportunities, so if that's your cup of tea, by all means, go ahead. I'm more of a position trader myself.

Here's what I would do. Make a short list of the stocks you've wanted to own, but always refrained from buying because they seemed too expensive, based upon whatever valuation method you typically use (Price/Earnings, Price/Cash Flow, Price/Book Value, the guy sitting next to you on the train, etc.). As the recent weakness has been extremely broad-based, with every sector -- and nearly every stock -- getting hit, there are bound to be some potential bargains out there.

Look for the proper entry point for these stocks. Let the market stabilize a bit. Historically, the "V-shaped rebound," where prices quickly recover after a major correction, is very rare. More likely, the market will first recover a bit, form a plateau, and then build a base before moving higher. Even if you don't get in at the absolute low point, you should end up with a decent return. Look for some market stability first, which will indicate that the base-forming phase has begun. Of course, assuming that the market spends a couple of months building this base, you might end up sitting on "dead money" for a little while.

On the other hand, there are several stocks that look very attractively priced, and will "pay you to wait." In other words, they're currently paying very attractive dividends. A case in point is GE. The stock was recently trading at about $19 share, a level not seen since almost 12 years ago. The shares featured a price/earnings (P/E) ratio on trailing 12 month earnings of less than 10, also well below GE's historical experience. Granted, the most important thing to consider is GE's future earnings power, which is decidedly uncertain. Still, at the current price, it appears that the market is factoring in a very bleak 2009 (and perhaps 2010) for GE. Then, there's the matter of the aforementioned dividend. GE is currently paying a dividend of $1.24 per share. At the current $19 share price, that represents a yield of about 6.5%. Therefore, if you bought GE, and it went nowhere for a year, and you simply collected your dividends, you'd have earned a 6.5% return, which compares favorably with the returns you could earn from say, Treasury bonds (even after factoring in the equity premium).

I use GE as simply an example. There are several other stocks which would make this list.

However, to repeat, it's probably best to avoid the market altogether for a little while. Right now, it's safer to be a spectator than a speculator. Unless you don't mind flying face-first into a cactus every now and again.