Would you have preferred to go home long at the close on Friday, or short? That’s a question we frequently ask in the Rick’s Picks chat room toward the end of the trading day – a little game we play to position ourselves for the next day, in true contrarian fashion, against whatever strategy feels most comfortable. If we have succeeded, we will have placed ourselves, psychologically speaking, squarely in harm's way. We do so knowing that the only possible buyers of shares these days -- other than Kudlow and friends, of course -- are bears covering short positions suddenly turned painful. It therefore follows that if bears seemed mellow and complacent at Friday’s close, we should have wanted to load up on stocks, since any news over the weekend that might cheer investors even slightly would be likely to touch off a short-covering tizzy come Monday morning. However, if bears seemed fearful, running up share price in the final minutes, then we should have wanted to go home short up the wazoo.

(Click on chart to enlarge)

Truth to tell, we had trouble discerning a psychological  “comfort zone” to trade against Friday afternoon. Although the Dow finished down nearly 200 points, that was 120 points off the lows, and there were no clear signs of panic by either bulls or bears as their respective opportunities to freak out dwindled in the final hour.  If it had been a game of chicken, both drivers probably would have been content to go over the cliff.

Hell Week

With no signs of craziness to guide us, we found ourselves weighing the facts, dismal as they are, and concluding that stocks are far more likely to go plummeting into the bowels of Hell next week than to continue acting as though we'll somehow get through this mess together.  Although Optimism is still the official line from the likes of Mssrs. Paulson and Bush (although no longer from a seemingly chastened and gimlet-eyed Mr. Bernanke), it is sounding more and more strained each time the Fed announces yet another extraordinary measure to keep this or that financial disaster from snowballing.

On Friday it was troubles at Bear Stearns (which, by the way, was a short recommendation in Rick’s Picks  Thursday night, albeit an extremely difficult one to execute).  Bear, as you may recall, was among the first blue chip financial firms to acknowledge significant balance-sheet problems a few months ago.  The company’s troubles did not appear to be of the unmitigated sort at the time, at least not to those who have been getting their news from CBS, The Wall Street Journal and The New York Times, but they have clearly become so since. As much became evident on Friday, when J.P. Morgan, under the Fed’s spin-control aegis, purported to ride to Bear’s rescue. There were rumors that Citigroup could be the next big “surprise,” but will any of us be truly surprised if it turns out that Citi’s still metastasizing troubles are fundamentally as serious as Bear Stearns’ ?

$1 Trillion Blown

What would surprise is if there were any signs whatsoever that the Fed’s and U.S Government’s increasingly frequent and drastic interventions, each bigger than the last, were starting to work. But that is not even remotely the case. In fact, since August, when the real estate sector began to turn ugly, the Federal government has doled out nearly $1 trillion in direct and indirect support to the credit markets in a so-far failed attempt to unfreeze them.  Does anyone seriously believe at this point that more funny money bestowed by the Fed on bankrupt businesses is going to restore the confidence of investors, lenders and consumers?

Ordinarily we would acknowledge that the central bank will always have another card up its sleeve. But with last week’s new-lamps-for-old ploy to swap Treasurys for subprime rejectimenta, the Fed laid all of its card on the table. Sure, they could buy every home in America to “cure” real estate deflation. But before you start believing that this, or any other nostrum yet to come, is going to work, keep one thing in mind: Neither the Federal Reserve nor the Federal government has two nickels to rub together that do not come, ultimately, from taxpayers. And also this: We -- meaning you and I -- are already on the hook for a trillion dollars' (and counting) worth of rescue money and pledges, much or most of it deployed in companies that a prudent investor wouldn’t touch with a ten-foot pole.  That is $3,300 for every man, woman and child in the U.S., and every penny of it will have to be repaid by someone.

Meanwhile, with the Dow Industrials currently trading a mere 15% below their all-time highs, does anyone besides us judge Wall Street, and investors in general, to be a tad out of touch with reality?

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Take the Seminar at Night..

There’s good news if you’ve wanted to take the Hidden Pivot course but have been unable to attend on weekend mornings.  In mid-April, I’ll be conducting the six-hour class over two consecutive evenings – Wednesday and Thursday, April 16-17, from 6 p.m. to 9 p.m. MDT.  Click here, and then on the “Upcoming” tab to register; or here if you would like more information as well as a detailed description of the Hidden Pivot Method and a free Hidden Pivot calculator.