Do We Trust This Schizophrenic Market? Friday's 6% gain was pretty exciting, right? Almost as exciting as Thursday's 7% dip. Geez - prior to October, one swing of 5% or more in either direction would cause high blood pressure. Now a daily swing of 5% or more is the norm. The question is, does Friday's big gain finally hint that the market's going to recover? I wasn't kidding in a blog entry Thursday that suggested I'm willing to take a swing on a bullish trade now. However, I haven't yet, for a very good reason ... I still don't quite trust this schizophrenic market. If you look back to late September, how many times have we seen these huge, monster-sized gains? There have been a total of seven major one-day-wonder rallies (I'm not counting small or tiny gains). You know how many times we've seen two winning days back to back if one of them was a huge rally though? Not once. The market just can't string together two consecutive decent days ... or at least it hasn't in weeks. That's why I'm skeptical about jumping on the bandwagon after Friday's upside explosion.  (For a more detailed explanation about why you may not want to be too trusting of these extreme swings, I'll refer you back to the October 30th newsletter "Why the Market Can't Put Two Winning Days Together".)  However, there was something unique about this latest dip that could have changed things for the better on a more permanent basis.    So Bad It's Good? Did anybody ever think we'd see the S&P 500 fall under 2002's lows again? I fully expected nastiness was on the way a year ago - that's just the cyclical nature of the market. However, I have no problem saying I was surprised to see things get this bad, this quickly. On the other hand, I wasn't nearly as surprised about it after October's carnage ... things have a way of going from bad to worse when nobody thinks it can get worse. Well, that's what we did on Thursday; the S&P 500's low of 741 eclipsed the low of 768 made in October of 2002.  So what? It's supposed to be bearish to hit new lows, but I've observed just as often that it can be bullish. Somehow the market has a way of knowing how to inflict enough pain and incite enough fear to steer the majority of the people in the wrong direction. And, I'd say falling to new multi-year lows qualifies as a nerve-racking misdirection. Now with most people probably convinced things are going to get worse - or at least no better - it would be the perfect time to start making a rally ... a rally nobody would believe in until it's well underway. (This would be a typical reaction in the middle of a recession, as we'll see in a moment.) Now, there are a couple of challenges to my posed bullish idea.  The first one is, the other indices have not yet hit fallen to 2002's lows. I can understand how the NASDAQ didn't, as it put up some major gains between 2003 and 2007. I can't understand how the Dow didn't hit 2002's lows though - it's laden with financials, an automaker, and a couple of industrial names that have been hit hard by this recession. But, neither index did. The 'challenge' is simply the possibility that all the indices have to fall to new lows to get the much-needed psychological capitulation. However, don't assume it has to happen ... I'm just saying it would make it easier to accept the bullish idea if it did happen that way. The second challenge to a bullish expectation is just a lack of believers, or more specifically, a lack of bullish volume. The few bullish days we've seen lately have been made on mediocre volume, but mediocre - and sporadic - isn't going to cut it. Not only do the bulls need to string two or three winning days together, they need to grow their numbers so there's some hope of longevity for any uptrend.    Undervalued, Overvalued, or Irrelevant? Of course, the $64,000 question is one of valuations - are stocks worth their current prices or expected valuations? Funny thing about valuations ... what seems to be 'worth it' when stocks are on their way up is different that what's 'worth it' when stocks are on the way down, even at the same valuation. Nevertheless, every stock is eventually priced appropriately (though not rationally), so... Stocks are now valued at less than they were at the low point of 2002 on a current price/earnings basis. On a trailing-twelve month basis (the last four quarters), the S&P 500's P/E is around 11, which hasn't been seen since the 80's. Nice. The flip side ... a 'current' P/E is actually history; the only thing that matters now is the future.  On a forward-looking basis, the S&P 500's price/earnings ratio is even more attractive; it's expected to be about 10 over the next twelve months, which is a gutsy projection considering earnings fell by an average of more than 20% in this last round of quarterly earnings announcements. In other words, a lot of companies think next year is going to be a lot better than this year, according to the math. None of them have really explained why they're still so optimistic though. Personally, I don't quite see it happening. You know what though? I'm not entirely sure all this valuation, projection, and recession banter should be your only consideration.  Stocks rarely trade at what they're worth; they usually trade at prices the market thinks they're going to be worth in the future. What's that got to do with us now? Over the last 50 years, the market has actually gained an average of nearly 30% during the latter half of all its recessions. So, if you're waiting for the economy (and earnings) to fully heal before diving in again, you're probably going to be late to any rally. My point is, don't assume stocks can't get cheaper either... the forward-looking P/Es are overly-optimistic. At the same time, don't get bogged down or scared away by hefty valuations ... valuations only matter when investors want them to matter. Sometimes it's just time for the market to rebound even though P/Es are still high, which is why we watch the charts so intensely. My bottom line? Monday - and even Tuesday - are going to be crucial for the bulls. Friday was a great start, but we've seen those fake-outs before. If we can get just a little more follow-through early in the coming week, it may be worth taking a bullish swing ... even if just a short-term one initially. And who knows? Maybe this move will finally get the 'big one' started. I'm not counting my chickens though - I'm just thinking about making a little money on a possible upside move over a few days. Past that, we'll see. Stay tuned to the blog and the newsletter - every single day matters right now.   Voyant Sends a Letter - Fairly Predictable Stuff, But... Maybe you saw this week's letter from Voyant International's (VOYT) CEO Dana Waldman? If you didn't, I don't know that you missed a whole lot - it was a brief update on some of the current projects ....white space radio, RocketStream, and Aviation Broadband. There was one new item that came up though.  Remember the name 'RocketConnect' - I suspect we'll be hearing it more in the near future. As near as I can tell, RocketConnect is RocketStream for consumers. RocketStream was targeting businesses and organizations with massive data transfer needs. RocketConnect is targeting end users - ordinary people at their desktops and laptops - to accelerate the speed at which they send and receive information over the web.  I couldn't perfectly tell, but it appears as if this product is going to be piggy-backed somehow with Internet services already being provided to consumers. Maybe there's some sort of revenue sharing arrangement being forged with ISPs. The reason I say that is simply because Waldman said to think about the potential sales volume on the same scale as cable/telco volume.  It'll be interesting to see what it is and how it plays out.  Everything else in the letter was fairly predictable.  By the way, did everybody see Voyant's most recent 10Q? It quietly came out Monday, and was essentially what we were looking for... a little more revenue, but nothing life-changing. They pulled in $177K. For comparison, they did $133K last quarter. So, the increases are coming. (Any increase last quarter is impressive.)  What's been fascinating for the last two quarters now is the massive gross margins we're seeing. Their cost of sales was $30K last quarter, and only $13.3K this quarter. That's a gross margin of more than 90% ... which is why software is such an attractive business to be in. I think margins will head lower as the other business ventures ramp up. But still, that's impressive. RocketConnect will be the same way - once developed, it costs nothing to share it, yet it still bears revenue.