What a Week: Is the Bear Headed Back to the Woods or Leaving Traps Behind?

SAN FRANCISCO -- The ray of light spotted on Wall Street at week's end was neither the entertainer Madonna, nor the Mir space station streaking through the atmosphere. Instead, it was an intraday reversal Thursday and solidly positive session Friday that had some market participants dusting off the reasons to be bullish for the first time in a long time.

But the week certainly didn't begin with anything resembling optimism, and a host of market participants believe the week-ending advance will prove to be like so many others of late: destined to fail.

For the week, the Dow Jones Industrial Average fell 3.2%, the S&P 500 declined 0.9% and the Nasdaq Composite rose 2%, snapping a seven-week losing streak.

Those looking at the "glass is half-full" scenario were encouraged that the deeply battered (and refried in bear oil) Nasdaq outperformed this week. To optimists that suggested the selling may have run its course in growth names, while the more recent devastation of so-called defensive names means the cycle of selling is nearing completion.

Furthermore, it could have been a lot worse: At its nadir Thursday, the Dow traded as low as 9106.54, but closed the week above 9500. The Dow avoided joining the S&P and Nasdaq in official bear territory, as defined by a more than 20% drop from its peak. But that did not alter the fact that there was what Sam Ginzburg, senior managing director of equity trading at Gruntal, described as "irrational selling" in the wake of the Federal Reserve's decision Tuesday to lower interest rates by 50 basis points, rather than the hoped-for 75 or even 100.

But despite the midweek signs of capitulation (albeit controversial), Ginzburg isn't convinced the worst is over because the advance late Thursday and Friday was without a significant catalyst.

"I do think we can have two or three good days, but I feel it's an impossibility we're out of the woods," he said. "I still think we're in the sixth or seventh inning of a nine-inning ballgame" of selling.

That said, the trader also noted "good institutional buying" Friday and the fact "people want to buy stocks" and that the level of cash on the sidelines is "unbelievable."

Such is the conundrum all investors who've survived to this point now face: There was clearly fear this week, evidenced by the midweek spike in the Chicago Board Options Exchange Volatility Index and mutual fund redemptions. But at the same time there are legitimate positives, most significantly, that the Federal Reserve is becoming increasingly accommodative (even if not fast enough for some).

That combination -- in conjunction with a sense many stocks have been washed out and are no longer susceptible to bad news (shares such as Immunex (IMNX - Cramer's Take - Stockpickr), which plummeted 38% Friday being notable and painful exceptions) -- has some believing any snippet of good news can reignite buying.

If Alan Greenspan makes positive comments, or the tax-cut proposal is passed or just one bellwether company announces it can see the end of the tunnel -- that it's starting to see an upturn in orders -- "you'll see people closing their eyes and buying, Ginzburg said. "Nobody wants to be the last one to the party."

Pin the Tail on the Market

But being last to the party -- or at least late -- is precisely the recommendation and strategy of Hugh Johnson, chief investment officer at First Albany, which has about $630 million under management.

"Many conditions that accompany the end of bear markets are in place," Johnson said, citing Fed easing and the overall liquidity picture, a steepening yield curve , small-cap outperformance and narrowing credit spreads. "The only thing missing is a bull market."

Johnson was being facetious (I think), but his point was that he "wouldn't be the least bit surprised if [Thursday] was bottom, or if we have to wait until June. There's no way to tell if that's it -- there is no road sign."

If that sounds like a huge qualifier, Johnson conceded he "is going to be late to the party and miss a lot of the fun" should this week eventually prove to have been a turning point. But his strategy is to avoid the risks as well, which he did by adopting a defensive stance in September and helping First Albany gain 0.7% last year.

That allocation mix adopted in September -- 52% stock, 38% fixed-income and 10% cash for moderate-risk portfolios -- remains intact today. "The next change, I presume, will be an increased exposure to stock, but I don't expect that [to occur] in the next two weeks," Johnson said. He offered that a Dow move back above 10,500 would be a "tripwire" that he's watching for to determine whether a new bullish trend really is in place, although he stressed those targets can change almost daily.

So at the end of the day -- and the week -- investors who still control their fate must assess their risk tolerance, time horizon and, of course, level of confidence as to whether a rally can be sustained. Having a strategy that works for you is more crucial than ever because even the steadiest hands on Wall Street concede we are in uncharted territory right now.

Because of the historic market movements of the past five years (much less past five days), the issue of "lessons learned" was a common theme among market players this week. Specifically, if a new rally phase has begun, will investors have learned the benefits of diversification, or will they plow back into the old growth favorites en masse, perhaps setting the stage for another painful blow down the road.

I fear the latter scenario but have hopes for the former.