Bernpaulpresput? Bottom or not: what to do now!

The obvious questions that all market watchers almost instinctively ask after action like today is: Is this "the" bottom and what should I do now? Whether or not this is "the" big one is less important than what to do now. Noone can know for sure that this was an 87' type major low, the new volatility paradigm or simply the mother or all oversold bounces?

Whatever the case, I think it makes sense to acknowledge that it was a significant day. As news of a serious discussion on how to bailout the mortgage and municipal bond insurers spread, the market got the sense that all the king's horses and all the king's men were on the economic and market case. This follows a day when Bernanke effectively rolled over and cut rates to support equities in spite of significant inflation and inflationary pressure. Bernanke caved. Price stability no longer shares top billing with growth and inflation, but thats another show. Whether that comes home to roost is another story.

Its no secret that the economy is slowing and the slowdown accelerating BUT I dont think growth has slowed so much that the Fed had to cut as much as it did a couple weeks ahead of a meeting, and in the face of seemingly insipient pipeline inflation. Financial markets had become dysfunctional to the point where odds of a serious stagflationary recession where increasing by the day. If an MTG, MBI, ABK (or PMI or RDN for that matter) became insolvent, the ripple effects would be severe as the market could not help panic about who would be next or how bad the banks might get as they would be forced to take another round of asset write downs (for CDOs and CDSs gone bad).

U.S. financial conditions are clearly exacerbating and magnifying an economic slowdown which is young but snowballing. Just as the marginal consumer has neither the will nor resources to spend beyond their means these days, sharply widened credit spreads, heightened risk aversion and weakened capital positions have caused kept marginal market rates stubbornly high and lending appetite and/or werewithal limited.

The Fed is now acting aggressively (with monetary policy) to ease tight credit conditions and get rates down so and the administration, congress and regulators are scurrying to inject fiscal stimulus. The net of all that is we now have coordinated policy responses to all the economy's major problems. That's historically marked major lows. If the present rhymes with past policy responses then the market may bottom well ahead any light at the end of the tunnel. Does that mean that all is now well? No. The major economic problems we face - ie. subprime, derivatives, weakened financial intermediaries are not likely to be healed immediately. Nevertheless, we seem to now have the pre-requisites for the healing process.

Technically speaking, the fact that the move down was substantial and came on high volume after an equally impressive high volume intraday reversal suggests that this is at least a short or intermediate bottom. Financials, Techs and Industrials have been especially weak and have declined hard and fast without a substantial retracement for quite a while now. Financials, Techs, and Industrials among others are very oversold on all timeframes and primed for a bounce. Its my strong opinion that nothing short of a heavy volume follow through day would have been enough to stop the markets slide. The market decline had become very reflexive. Its often the case that motion motivates.

Fundamentally, there appear to be many a compelling buy out there these days. A lot more cheap names with decent sales, cashflow and earnings growth than you had a few short months ago. A lot of high quality, low p/e, low EV/EBITDA, high FCF yield names to choose from.

Net net net - play for a sizeable rally in the short run. We'll cross other bridges when we get there as they say. For now, my best guess is that one would do well to sell what you don't want to own for the next 3 years for better or worse. I say that because I think the market is apt to focus on quality w/o near term problems for the time being. Don't hold something simply because its down. You don't have to make your money back in the same stocks that you lost in. Identify your weakest holdings and swap them for better positioned names. This is an alphatimer's market, take advantage of it. For various reasons, my favorite names for new money today are NE, CE, IACI, GM, WB and CPKI (though I'd buy WB and CPKI slowly and only if I could add on a pullback since the move yesterday was huge)