Congratulations… you’ve almost survived the most volatile stock market of our generation.

At least for 2008 anyway.

And if you’re asking yourself whether it’s time to buy stocks as the CBOE Volatility Index (VIX) is receding and valuations are at record lows, I offer this: Before jumping back in the water, be sure the sharks have fattened up and left the area. Forget “blood in the streets”… make sure there’s no “blood in the water.”

And amid the gloom and doom, I’m also going to offer up a more bullish, optimistic outlook: While the economic outlook remains very weak, the stock market is, after all, a market.

By that, I mean that the main factor that drives prices up or down is supply and demand (with a hearty dose of fear and greed tossed in for good measure, too, of course). So what do we really know about supply and demand? And more importantly, how can we profit from it?

Look Forward, Not Back

Let me put it this way: The view ahead is better than the one in the rear view mirror. In fact, even over the past week, we’ve seen many examples of how the lack of supply for stocks is driving prices higher – even in the face of terrible fundamental news.

The issues are worth noting, in order to keep the impact in context…

• On the political front, we’ve seen the bribery of government officials in an attempt to sell a decision-making seat in one of our top governing bodies.
• We’ve seen one of the most highly regarded hedge fund managers be exposed as a charlatan, wiping out individual and seasoned professional investors alike.
• On the economic front, we’ve seen massive job losses that were substantially worse than expectations – and while this is a backward looking indicator, economists are now talking about double-digit unemployment.
• The Federal Reserve has hacked interest rates to the lowest level ever in what seems like the latest in a series of desperate reactionary tools to stave off the expanding and increasingly ugly recession.

The current climate resembles a rugby scrum, with each new issue piling on top of other existing ones. And they throw up questions about the very stability of our investing framework.

But underneath the bad news, there is still some resilience…

So Much For Selling Pressure: These Two Stocks Reported Awful Bad News… And Investors Loved It!

For example, we’ve recently seen Texas Instruments (NYSE: TXN) and Nokia (NYSE: NOK) dramatically reduce their earnings estimates for the current quarter and offer a dour outlook for 2009.

Specifically, Texas Instruments expects revenues to slump by 26% to 32% sequentially. Yet investors “rewarded” the stock with a 5% boost the day after the announcement.

Nokia has reduced its guidance twice so far this quarter – once on the earnings call and again at its capital market day on December 4. Expectations for fourth-quarter handset shipments are now a negative 5%. And while the stock initially dropped by 3%, it’s up 6% since the latest reduction.

What does this say? To me, it’s clear that the downward pressure on stock prices that we’ve seen from forced selling is over. So is this just cause to get back in the investing saddle? Consider these three reasons…

Three Reasons To Resume Your Investing… But With A Caveat

• All three major stock indexes closed above their 50-day moving averages for two straight days – the first time that’s happened since August.
• There’s also a lack of selling pressure for tax-loss purposes.
• Dow Jones reports that 344 funds liquidated in the third quarter. That was the first time on record that more funds disappeared than launched. It also means that there’s likely to be less selling pressure ahead.

All three of these reasons for buying stocks are valid. But beware… with a potentially disastrous earnings season on the horizon and volume drying up as we head into the Christmas season, short sellers may take the opportunity to drive stocks back below their 50-day moving averages if for no other reason than a lack of buyers. Larger funds may also take the opportunity to reduce potentially volatile positions.

Corporate America’s New Tagline: Aim Low!

At this time of year, thoughts turn to the jolly fat man who represents gift-giving and good cheer. Question is: Will he hit Wall Street this year?

Investors are hoping for the oft-mentioned “Santa Claus Rally,” but in a thin market like this one, it’s easy to be shaken out of a 10% stop-loss simply due to increased volatility.

The next fundamental opportunity to invest will be after we have a feel for what first quarter corporate earnings will bring in terms of growth rates and profit levels.

The January earnings will provide management teams with the opportunity to reduce expectations to a point where they will be easily achievable. Once the bar is set low enough and investors are comfortable with growth rates, they will begin to take longer-term positions and the stock market will likely stop behaving like a casino.

If you prefer to look at the technicals, simply wait until the indexes prove they can hold their 50-day moving averages under increased volume – and be ready to sell if earnings season proves to be worse than we are currently expecting.

Paul Moore
Smart Profits Report