I got another small surprise Monday night, browsing the major indexes.

As you can see from the chart above, the S&P 500 has broken the accelerated downtrend it’s been in since September.

Now, it’s true that this chart is only current as of Monday’s close. I’m writing you these words early Tuesday morning before hopping on a plane.

Perhaps while I’m up in the air at 35,000 feet, Treasury Secretary Paulson will say or do something alarmingly idiotic and help stocks return to form.

But if not, just imagine! The very idea that stocks don’t always go down and down… who’d have thunk it?

Whisper it Quietly

Okay, that was a wee bit of sarcasm (in case you hadn’t noticed).

If I felt like really pushing my luck though – being out of pocket for Tuesday’s market action and all – I could point out that the upmove from 750 to just under 910 on the S&P is a greater than 20% advance… and thus technically constitutes a new bull market.

Not that it’s time to go around shouting new bull market! That would be insane, and worse still not very helpful in terms of making money. Plus, with the volatility levels we’ve seen, 20% just doesn’t carry the same heft that it used to.

Wholly artificial and backward-looking labels aside, it’s eye-opening to note the backdrop against which stocks chose to rise these past few days. Just consider what the beleaguered bulls had to deal with:

• We got word of the ugliest jobs report since 1974 – 533,000 jobs lost – with gloomier-than-thou pundits falling all over themselves to point out why the report was actually even worse than it seemed.
• Treasury bond yields effectively hit zero as panicked investors parked their last slugs of cash with Uncle Sam. On Friday the U.S. Treasury three-month T-bill yield fell to 0.01 percent.
• Credit spreads on investment-grade bonds versus treasuries – a measure of what it costs for companies to borrow money – widened to super-panic levels last week, as the below FT chart shows.

In spite of that awful trifecta, stocks managed to put in a rather impressive reversal Friday… then powered higher again on Monday with news of the Obama infrastructure plan.

If Mr. Market has been fighting off a fever, we may have just seen that fever finally break.

When Yes Means No and No Means Yes (Maybe)

Does this mean that stocks have bottomed? Or, at the very least, that it’s time to again take a harder look at long-side opportunities, from both a trading and investing perspective?

To be honest, I’d rather prefer you didn’t believe that. Well, okay, maybe not you. But as for the investing public at large – we’re better off without their agreement at this point.

I should probably explain…

In order for stocks to bottom, we need to see maximum pessimism. It needs to be thoroughly common knowledge just how bad things are, with everyone and their brother fully aware that things are “only going to get worse.”

This reality is precisely what makes it so hard to buy near the actual bottom. By the time the market gets there, positive sentiment is all but washed out. At the bottom, the true believers have all been converted to cynics.

This ironic sliver of market reality creates a paradox. If you were to go around taking a survey of investors asking, “Is this the bottom?”, the results of the survey would have inverse value.

The more investors who responded to your ad hoc survey with a firm “NO” – or better yet with a “what are you, crazy?” – the greater the odds would be of a bottom having been reached.

Hardly anyone trusts the first ascent from the pit. Everyone is half-waiting for the whole thing to break again. Coincidentally, that’s why professional traders and investors tend to get the best prices… they’re the ones who can steel themselves against queasiness and uncertainty when the odds tell them to act.

Bottoms Aren’t the Point

At this point I have to share a confession with you.

In spite of what the thrust of today’s piece might imply, I don’t really care whether the market has bottomed or not. And you probably shouldn’t either. Here’s why.

If you are a trader, you act based on odds and probabilities (or at least you should). Solid trades, like solid poker hands, are all about getting a handle on odds and reward to risk.

If the reward to risk is right – if the probability and the setup is right – then you take the trade. If not, then you don’t. Trading gains are accumulated over time in this fashion – with large wins overpowering small losses – just as pro poker players accumulate their winnings over an extended series of hands.

If you are an investor, you act based on valuations and long-term assessments of what companies are worth. Like Warren Buffett, you may not “time” things, but you do “price” things. A skilled investor has the habit of looking at a stock quote and seeing the actual value of the business behind it.

For sharp investors the question is less “How much are the shares really worth” and more “How much is the business really worth?” How good a shape is the business in? What kind of cash flows does it have? What kind of long-term potential does it hold? If I could get the financing and the go-ahead to buy this company outright and run it myself, would I want to do it?

Some of you are traders, some of you are investors, and some of you (like yours truly) have a consuming passion for both.

Either way, if you’re really focused on your process – on using all the tools you have available to make money – then picking “the” bottom doesn’t matter so much.

Why Talk About This Stuff At All Then?

Okay, some of you may be wondering now, if calling the bottom isn’t all that meaningful for the trading and investing process, why talk about bottoms then?

The reason to talk about this kind of thing is because there is real value (in your editor’s humble opinion) in analyzing the tone and tenor of market action.

It’s useful to get a handle on how the market is acting, just as it’s useful for a doctor to have means of checking the symptoms and vital signs in a patient.

The key differential comes down to purpose – it depends on what you do with the information you collect, and what your mindset is in collecting it in the first place.

Following market action with the goal of saying “I called such and such a move,” or to win an argument or bolster a pre-existing opinion, is one thing.

Dissecting market action with a cool, dispassionate eye – looking to inform the choices you make with a better sense of odds and probabilities – is quite another.

A Possible Inflection Point

What we’ve seen in the past few days, I believe, is a possible inflection point… a point in the cycle at which the news got about as bad as it could get, with credit spreads on investment-grade debt about as wide as they could be… and yet stocks shot up anyway.

I think, too, that we just might be in the midst of a psychological inflection point here.

After an extended nightmare of government dolts who screwed up at every turn, and banks that blew up every time a Wall Street CEO turned around, we are finally starting to get a handle on what tomorrow might look like.

Source: Source: The Perverse Logic of Market Bottoms