Party Like It's 2007

Monday saw the Dow Jones Industrial Average (DJIA) soar a whopping 936 points. According to Bloomberg, the 11% increase on the day was its best percentage gain since 1933, and the point advance the best ever, easily beating the previous best 499 point gain of March 2000.

It was party time for the many punch-drunk stock market investors who were left reeling after last week's 18% plunge in the Dow. Whichever way you look at it, these remain unprecedented times for stock market investors.

I doubt I'll ever see some of the single-day share price movements of large household names again in my investing lifetime. For example:                                    

Suddenly, it was party time again on the stock market.

It was like we'd just wound the clock all the way back to October 2007, a time when the Dow peaked at over 14,000 points. Stocks were the flavor of the day at cocktail parties and barbeques across the country. Sure we'd already had our first glimpses of the sub-prime mortgage mess, including falling house prices, but the market looked to have shrugged them off as a passing phase.

Maybe people didn't want to believe the subprime crisis could wreak havoc on financial markets. Maybe they simply didn't know what it all could mean to the global financial system. Maybe they just used the opportunity to buy when the market dipped, a strategy that had worked so well in the bull market that started in March 2003. Or maybe it was pure ignorance.

Whatever it was, we were collectively wrong.

Fast forward to now, and if you are anything like me, you are probably wondering if Monday was the day that finally broke the back of this bear market.

Well, it certainly made a statement! I had a feeling we were close to a market surge, as judged by these six classic signs of the market's bottom, but I had no idea how fast and how much it would rise.

The market is already assuming we're in recession
Obviously, even though many of us might like the Dow to be back to 14,000, as it was almost exactly a year ago, the stark reality is that today it still trades below the 10,000 mark.

House prices are still falling. People are still losing their houses. Unemployment is still rising. A recession is all but guaranteed. In short, there are still plenty of reasons to be worried about the near-term future. It may be party time now, but if you party too hard now, the hangover may be more painful.

That said, a recession is already priced into many share prices today.

You've got a huge company like Walt Disney (NYSE:DIS), whose Chief Executive Robert Iger told journalists just last month that "our business has been quite resilient ... global theme parks have held up extremely well," trading on a price to earnings ratio (P/E) of around 11.

Then you've got Best Buy (NYSE:BBY) who last month said it expects comparable store sales gain for fiscal 2009 to be in the upper half of its previously disclosed range of 1% to 3%, trading on a P/E of just over 8.

Never forget the lessons of last week
Even after Monday's huge rally, as you can see above, there remain plenty of attractively priced shares out there. It remains a stock pickers market.

Yet we shouldn't forget the lessons meted out to us last week...

• The market can stay irrational for longer than you think.
• Excessive debt is evil, and can ruin a company, and your portfolio.
• Greed will be punished, eventually.
• Fear makes you do irrational things, often at precisely the wrong times.
• Your health is your greatest wealth.

It was party time on Monday, but predicting the day to day movements of stock markets is a lottery in the best of times.

That's why here at The Motley Fool we've always encouraged you to focus on the long-term when investing in the stock market. If you have a long-term perspective, don't trade with excessive margin, and have  a diversified portfolio, you should have got through last week battered and bruised for sure, but fit to fight another day ... like Monday, for example.

Sure this market is not out of the woods yet, nor is the economy. I wouldn't be surprised to see a day this week or next week where the market plunges 300, 400 or 500 points. It's that sort of market right now – the underlying emotions remain nervousness and fear.

But that shouldn't stop you buying great companies at fair prices and holding them though any major downswings. As ever, the old rules of investing still apply.

In the meantime, enjoy the well-deserved party, if you can.