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Take Advantage of a Market Reversal

Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on . He's also a regular contributor to RealMoney ,'s subscription site. If you'd like to see all of Jon Markman's RealMoney commentary, click here for information about a free trial.

As the first quarter of 2005 fades into investors' rearview mirrors, the financial media have been quick to recap its results with a jaundiced eye. 'Twas bad, to be sure, for all indices and sectors not related to energy, utilities or basic materials, and it seems that everyone knows now that the bad tidings will continue as the feds bear down on a new round of villainous CEOs.

But will the past quarter's travails really continue in a straight line right through into the new quarter, or is a confounding reversal on the horizon?

It's tempting to see the world of finance as if it were on rails, advancing from point A to point B without a squiggle along the route. But unfortunately, it does not work out that way. Bad quarters sometimes lead to good ones, just as one-time heroes like Maurice Greenberg, former head of American International Group (AIG), can morph enigmatically into goats.

There's little doubt at present that a combination of higher interest rates, higher energy prices, weaker domestic employment and softening global demand will ultimately pummel the market this year. How could it not? Yet before the drubbing begins in earnest, there could be some remarkable trading opportunities in the opposite direction, and soon. And there's always the possibility, remote as it may be, that the recent decline has sufficed to discount market participants' expectations of rough stuff ahead.

Is He Crazy?

Robert Drach, a cynical but deadly accurate veteran of the investment advisory business, has kept his clients primarily in cash during the past year. But last week he began a process that took his accounts from 2% in stocks to 26% invested and now 50% invested. Drach revels in market declines, as he crows that they afford him an opportunity to exploit less-experienced players' negative emotions to his advantage.

"At this juncture we prefer the market splat so we can move to full investment without interruption," he said on April 3, recommending the purchase of beaten-up stalwarts such as Doral Financial (DRL) and Citigroup (C). "The process of profit extraction requires taking advantage of fellow market participants. Almost every position we purchase is directly against prevailing sentiment."

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