3 Reasons Why Investors Will Panic Again

Few things beat the thrill of owning stocks on a day like Tuesday. Yet just as experienced long-term investors have kept the losses of the past year in perspective, so too should you not draw any major conclusions from yesterday's gains.

Sure, the major market benchmarks gained 5% or more on Tuesday. Those are healthy rises -- but if you look back, you'll see that the last time the S&P 500 closed this high was on Feb. 27, less than two weeks ago.

Unfortunately, there are plenty of reasons why we may not be out of the woods yet. Here are just a few.

1. Even in a rebound, for every two steps forward, there's a step back
Just as few bull markets feature stocks moving straight up without any hiccups along the way, bear markets don't always involve uninterrupted crashes. Most often, you'll see plenty of moves in both directions, with the overall trend only becoming clear after longer periods of time.

For instance, since the last bull market ended in October of 2007, we've had a number of significant bounces in the S&P:

• From March to May 2008, the S&P rose from its March lows of slightly less than 1,275 to about 1,425.
• After October 2008's lows around 850, the index bounced back to over 1,000 in just over a week.
• Then later in November, the index plummeted to 750 before recovering to 935.

To put in that perspective, Tuesday's gains could easily be just the beginning of a more substantial up move -- and yet still constitute only a bounce in the ongoing bear market.

2. More bad news on the earnings front
Most analysts expect another round of terrible earnings reports from the first quarter of this year, which will get announced predominantly in April and May. For instance, look at these projections for some major U.S. companies:

Source: Yahoo! Finance. As of March 10.

Even if the economy has started to turn back from recession to recovery, it won't do so overnight. As massive as the amount of economic activity in the U.S. is, turning on a dime isn't a reasonable expectation.

3. Investors have to change their attitude
And expectations are what matters most right now. What the economy will actually do isn't all that important -- because everyone has a pretty good sense that the economy will be lousy for the foreseeable future. However, the sea change in the markets will come when investors start reacting differently to all the bad news.

Recently, uncertainty has dominated the markets. With government intervention becoming a nearly everyday occurrence, investors haven't had any idea what to expect. The specter of nationalization put fear into shareholders of financial companies -- and since they are at the epicenter of the current crisis, they carry huge symbolic value even beyond the critical role they play in our economic system.

However, if investors start looking for news that supports a glass-half-full theory rather than sticking with the gloom and doom that has dominated over the past six months, the markets have plenty of room to run on the upside -- even before a real recovery takes hold.

How to prepare
So what's the right strategy for your investments now? What you should do hasn't changed since yesterday, or last month, or last year. Many of those who've carried on with their normal investing strategies have taken big losses, but they see those losses as temporary. Meanwhile, with money they've added to the market after its crash, they're picking up shares of the companies they want to own at prices they could never have imagined seeing before all this happened.

So, just as the market's drop didn't mean that the world was going to end, yesterday's rally certainly doesn't mean that we've hit bottom and the bear market is officially over. When it comes to the important investing decisions you need to make, however, none of that really matters -- so enjoy your gains, but don't think of them as anything but a bump in the road.

For more on investing in any market, read about:

• Stocks for the next Great Depression.
• Why Warren Buffett is buying stocks now.
• You should buy the cheapest stocks around.