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After ten losing weeks since early May, the Financials ((NYSEARCA:XLF) +10.2% W/W) reversed the pattern last week. What does that mean for the general market?

As I see it, there was a lot of short-covering and attempts at bottom-picking by day traders, but not much serious action by long-term oriented traders. I say that because the weakest companies had the shares that gained the most this week. Fannie (FNM) and Freddie (FRE), for example, gained +30.7% and +18.5% W/W. Among the banks I follow, Bank of America ((NYSE:BAC) +26.9%), JP Morgan ((NYSE:JPM) +20.7%) and Citi ((NYSE:C) +19.5%) had the biggest gains, and among the broker-dealers, it was Lehman Brothers ((LEH) +32.4%) at the top.

Although I’m not among them (at least not in all cases), there are professional analysts who think most of these Financial operators are toast. Arguably, Fannie and Freddie would be if they had no support in Congress, and how Lehman and JP Morgan would go if their CEOs didn’t take 2 of the 9 seats on the Board of directors of the important NY Fed is questionable.

It strikes me that traders are watching the wrong signals; they ought to be watching the stock performance of the strongest companies in each sector. Trying to assess the going-concern prospects of a woeful financial services company when you do not understand and cannot evaluate their liabilities and potential losses is a mug’s game.

But, what else can traders do, so they play the market like a ping-pong board. How else could the market cap of LEH grow by one-third in five days?

The Chinese authorities must have a big laugh when, after Treasury Secretary Paulson admonishes them for not adopting a market driven model, they observe the market cap of five of America’s biggest financial corporations (BAC, JPM, C, LEH and FNM) up over +26% in a single week.

I wrote some time ago that the market has lost its ability to price value, which is a different issue than the subject of Bear market volatility. The fact is we don’t have the information at hand to price value. The regulators (as in the case of the Fed dropping M3, for example, or the SEC allowing offending broker-dealers to abuse the short sale rules) and the banks (not coming clean on losses and write-downs) are hiding information, and apparently they expect us to sit back and accept the crumbs they give us.

When was the last time a banker received a prison sentence for more serious crimes against the public than “our” Martha for example?

Yes, Mr. Moral Hazard, when all this stuff ceases, there could be a free market. Then, and only then, should the Treasury Secretary advocate the unconditional support of international capital markets. That’s an ideal to which we all aspire, but seasoned traders, fortunately, know better. And the Chinese, in case the US authorities doubt this, happen to be pretty fair traders as well as business people.

But, let’s not get hung up on stuff we already know. Let’s pay more attention to the future. What I mean is: are we starting to zero in on prospects for our portfolios for the next Bull market?—you know, the time when our decisions are made with a longer than day-to-day or week-to-week orientation… Yes, decisions based on fundamental, quantitative and economic reasons as well as the technical analysis that we seem just to be focused on these days.

Maybe not at these price levels, but not far off in some situations, I think a Bull case can be made for the likes of IBM (NYSE:IBM), Intel (NASDAQ:INTC), General Electric (NYSE:GE), Exxon (NYSE:XOM), Wal-Mart (NYSE:WMT), Procter & Gamble (NYSE:PG), Toyota Motor (NYSE:TM), Research In Motion (RIMM), Google (NASDAQ:GOOG) and a few smaller ones like Silver Wheaton (NYSE:SLW) and Suncor (NYSE:SU) and even a value play like Tata Motors (NYSE:TTM). There are many European companies like Nokia (NYSE:NOK), ABB (NYSE:ABB) and Diageo (NYSE:DEO) and Brazilian companies (several) I like as well.

My point is that if you are not watching these stocks, at least week to week, you will not be ready to execute trades somewhere near the cycle bottom. In a couple months there could be a massive sell-off that scares the daylights out of you, and if you are not prepared to let the falling prices come to you at that point, you will be too busy running with the crowd, and settling for smaller Total Returns in the future.

Trading is about preparation. Managing a securities portfolio is, like Charles Dow wrote over 100 years ago, much like running any business based on strategies and tactics. Effective trading that is based on a plan helps you accomplish your goals.

Source: Zeroing In on Prospects for the Next Bull Market