Following the envisioned 2½ -5 session “lift,” there should be an attempt to sell stocks back down and potentially retest last week’s lows. Historically, 70% of such downside retests are successful. In this case, however, I think the odds are near 100% that the trading lows are “in” for the year.

Short-termers, then, should scale-sell strength in the aforementioned ETFs and wait to see how the market’s “internals” look during any subsequent pullback attempt. As for the financials, we think they should be sold, except for some very select special situations, on the premise that their fundamentals are not all that better even following the proposed bailout.

Moreover, my sense is there will be a huge number of lawsuits regarding the potentially illegal maneuvers employed by the government to “save” select financial institutions. Ditto, I think gold is a “sell” in the short term since after last week’s geometric rally, history suggests taking some profits is in order, as well as the fact that investors’ attentions should now turn back from gold to more conventional equities.

Longer term, however, I continue to think the yellow metal is in a secular bull market. The real question going forward is, “Has a recession been avoided?” To this question, I answer with a resounding, “Maybe.”

While I've been adamant since the beginning of the year that there would be no recession in 2008, I've become increasingly worried about 2009. Still, my “call” is that the economy is likely to continue to “muddle,” but I have to admit the odds of a recession have clearly risen for 2009. Consequently, while traders may trade the wiggles, investors should stick with those sectors where the fundaments look decent whether the economy slides into recession or not, preferably situations with dividend yields.

As stated last week, the healthcare and food sectors (including agriculture investments) look better than most in this regards. Similarly, defense and homeland defense’s prospects appear favorable, as do our themes of water, electricity, infrastructure, select special situations, and now that the Olympics and Paralympics are over (the Paralympics ended September 17), China’s factories should crank back up implying “stuff stocks” (energy, timber, base metals, etc.) should fare better going forward.

And don’t look now, but after the drubbing many of the emerging markets have taken, year-to-date, scale buying of them seems appropriate (we use mutual funds for this allocation and overlay them with select country ETFs).

Some individual names for your consideration that are rated favorably by my fundamental analysts include: Johnson & Johnson (JNJ), Alaska Communications (ALSK), Harris Corporation (HRS), EMBARQ (EQ), Cogent (COGT), Covanta (CVA), Linn Energy (LINE), and perhaps the best business model there is, Automatic Data (ADP).

The call for this week: I stated in last Monday’s missive that I thought a stock market “low” was in the process of being made and suggested participants conduct themselves accordingly. I further opined:

“The ideal daily pattern for today (read: last Monday) would be for a hard down opening followed by a rally attempt, which fails, leading to an afternoon downside ‘washout’ and then firming into the close. Any closing strength should be viewed as a positive since that would likely indicate a skein of positive closes. While more conservative types should probably wait for the aforementioned pattern, more aggressive participants should buy the hard down opening on the belief that Paulson and Bernanke are cognizant of markets and will NOT want to see their “trifecta” come unraveled. Consequently, the Fed will be pumping money, shortsellers will be monitored, corporations will be urged to institute share buybacks, and mutual funds will be forced (coerced) to buy.”

Obviously, all of my premonitions came to pass last week with even more government intervention than I envisioned! And, this morning Goldman Sachs (GS) and Morgan Stanley (MS) offered more revelations. While the Illuminati’s actions surfaced many longer-term questions like socialism, letting a primary dealer go bankrupt (Lehman Brothers), wiping-out the equity holders/preferred holders of the GSEs after months of telling investors to buy said equity, etc., I think the stock market “lows” are “in” for the year! Following the initial 2 and a half to 5 session lift-off, look for the prerequisite pullback, followed by an extension of the rally as risk premiums contract. The real question is, “Has a recession been averted?” On this question I'm not so certain as the odds of a recession in 2009 have clearly risen.