DISCLAIMER : THE FOLLOWING "How to Play 2004" CONTAINS STRONG OPINIONS WHICH ARE NOT A REFLECTION OF THE OPINIONS OF FOX NEWS AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE WHEN MAKING PERSONAL INVESTMENT DECISIONS. IT IS FOX NEWS' POLICY THAT CONTRIBUTORS DISCLOSE POSITIONS THEY HOLD IN STOCKS THEY DISCUSS, THOUGH POSITIONS MAY CHANGE. READERS OF "How to Play 2004" MUST TAKE RESPONSIBILITY FOR THEIR OWN INVESTMENT DECISIONS.

It’s going to be real tough playing the market in 2004 for several reasons.

For one, there will always be the specter of so-called bad news such as terrorists attacks, more corporate maleficent and that dreaded Federal Reserve (search) eventually hiking interest rates. Investors are going to have to deal with two dynamics - the fear outlined above and the fact that the backdrop to the stock market has gotten better to the point where it is tough to disparage a rally, and perhaps dumb not to benefit from one. Stocks have come out of the gate in 2004 with gusto not seen since the early months of 2000. According to The Stock Market Almanac the way the five-days of trading go, so too does the year go. In fact, there have only been three instances when the market was up during the first five sessions and not higher at the end of the year - each of those years was interrupted by a war. So now the market has history on its side. History actually will serve as our guideline for 2004. The blueprint was established with the crash of 1929 and the subsequent years that immediately followed. I’m not here to proclaim that the road ahead will be all wine and roses. There are so many unknowns ahead and the market, despite all its bluster, will not be able to hold up under a major terrorist attack or anther hiccup in the economy.

That said; I think 2004 will squeak under the radar of doom and provide investors with bountiful returns. The rationale for this includes the stimulus that is already in the pipeline, and overdue recoveries in jobs, IT spending and the aura of a presidential election. Then there is the blueprint from the 1929 crash and rebound…and crash and rebound…and crash and rebound…

Since 1900, there have been three secular bull markets and three secular bear markets. (There are various definitions of secular, including 10 to 50 years, but for this piece let’s just call it more than five years.)

History of secular cycles in the stock market since 1900
Secular Bear Markets Secular Bull Markets
Years Duration Years Duration
1906 to 1921 15 years 1922 to 1928 7 years
1929 to 1949 21 years 1950 to 1965 16 years
1966 to 1982 17 years 1983 to 1999 17 years

Amateur-investors.com

During these great swathes of time there have been fantastic counter moves, rallies in bear markets and major corrections in bull markets. It could be that the market is in such a period at this time? I think the NASDAQ for sure, for which there is less historic precedent, will be in a secular bear market for many years to come. The Dow, on the other hand, officially escapes the bear market that began when the index peaked in February 2000 with a close at a new all time high. From where it stands now the Dow could eclipse its former all-time high of 11,750 on the eve of the presidential elections. (I say this thinking that it will be a much better year for small caps than for Blue Chips.) The Dow makes a significant technical breakout with a close above 10,500. Beyond that point there is very little resistance up to the aforementioned 11,750.

While last year’s rebound was admirable, it doesn’t compare to the rebounds of the past after the market had endured severe bear moves. After the bottom was reached in June 1932, stocks in general rebounded 137 percent. Large cap stocks were up 54 percent and the small cap stocks were up on average 142 percent. That makes the moves in 2003 of 20 percent and 50 percent pale in comparison and suggests that there is more upside for both classes of stocks. By the way, for those that have been hesitant to buy stocks, I once again point to history as a guide. When the market bottomed in June 1932 there were three things an investor could have done:

Scenarios at the market bottom on June 1st 1932
Actions Results
Did Nothing It would have taken 4-years and four months for investors to break even if they just weathered the storm with their heads in the sand.
Bought More It would have taken investors who bought at the bottom only 3 months to break even
Sold Out Those investors that sold at the bottom lost 78 percent if they were long at the beginning of the bear market move. (Sort of like being that last person shot trying to scale the Berlin Wall only to see it torn down weeks later. Actually, we see such emotional capitulation all the time.)

Alliance Capital

That said, I reiterate the thought that the market will rally this year, at least into the election, thereafter we could see an anti-climatic sell-off, as it is unlikely that there will be a 100-day honeymoon with President Bush (like wearing white for a second marriage). I say this also acknowledging heightened investors’ zeal if both the House and the Senate become overwhelmingly Republican.

The Challenges

I think there will be two times when the heart of the market is tested. There will be the overdue obligatory correction of 5 percent to 10 percent. A correction will happen this year, and it could come in conjunction with challenge No. 2: Fed rate hikes.

If the market gets too far ahead of itself, a possibility given the pent up buying anxiety and huge amounts of dough on the sidelines, then it will go through a tough digestive period. Last year whenever the market paused investors didn’t panic, but one could sense that they were crowding around the exits. The conundrum for investors last year was waiting for the correction so new money could go to work. The problem is that everyone had the same line of thinking and that is why, despite the fabulous year, there was less volume in the market in 2003 than in the lousy year of 2002. The new conundrum is for investors to throw caution to the wind and buy sans the correction. If this describes you then the question that has to be asked is if you are able to handle a sharp hit to the portfolio? The title of this piece is “How to Play 2004”, it really should be “How to Handle the Eventual Air Pocket That Will Shake the Masses”.

There are two ways to play the market in 2004. One is to participate in momentum stocks that may not have the underlying fundamental justification for swift upside moves. These sort of ideas need to be traded before they peak, typically within 30-day intervals. The other way to play this market is to buy into the notion that companies in IT, and job creation will outperform. In many cases these stocks will achieve multi-year highs and metrics that approach nosebleed levels of 2000. These are the stocks that are worth buying and riding out the air pockets. The Fed hike in of itself may not be the moment the market dips. At this stage of the game the fed will certainly telegraph any rate hike, possibly by several months. Once these hints are made the Street will begin to run for cover. The reaction could be so dramatic that by the time the fed actually pulls the trigger the market will be ready to rebound. (This is the scenario I think is most likely. Moreover, I think that once the Fed raises rates it argues that a real and sustained bull market is on the horizon as the Fed wouldn’t change course unless they were absolutely sure the economy could enjoy a perpetual rebound without further assistance.)

Review

I think the best way to play the stock market in 2004 is to play the stock market in 2004. I hate hearing folks come on television and say “that the easy money has been made”; yeah right! These are the same pundits that were so afraid of the market that they never said a nice word, let alone urged investors to take the plunge. Now these same experts are going to wave the flag of caution, but are saying that it will be harder to make money this year than it was last year. It could be, but if you don’t play then you don’t have a shot and the point becomes moot.

LONG IDEA: Lucent Technologies (LU ) @ $3.12

SKINNY: Lucent, formed by units of AT&T and Bell Laboratories, was incorporated in 1995 and has been providing communications services since then. The company has always been one that draws lots of attention from investors and isn't exactly known as a stock for lower-risk individuals (the stock carries a beta of 2.68) and has had troubled waters in the past like many other companies. As we reported back in October of 2003, the last time we recommended this stock, we believe that the bad news is set to lessen. When comparing LU to the industry, the company is undervalued on a price to sales ratio and has a higher short position that it's top two competitors that could provide for a little steam to the upside when the shorts unload. LU is trading $3.12, not too far from the 52-week high of 3.45, and taking a look at the recent news and action in the stock it is possible that the stock could be on the way back to that 52-week high. Last Friday, the stock exploded on huge volume and that move could continue into this week. Technically the stock has resistance 3.25, and with a breakout through there it should be on the way to 3.45, then 3.55 longer term (Market is the limit). Low risk investors should use 2.75 as the stop.

– Charles V. Payne is the founder, CEO and chief analyst of Wall Street Strategies .

Charles Payne is the host of Making Money with Charles Payne (weekdays 6-7 PM/ET).