Quadruple witching has led the fourth day of triple-digit intraday moves for the Dow. The ban on short-selling forced many traders to close out their positions rather than roll them over.

The big gains on Friday were really just an extension of what we saw on Thursday. Anyone who did not own stocks at lunchtime on Thursday missed out on the rally. The rally happened too fast for most investors to take advantage.

The speed and intensity of the rally demonstrated the importance of maintaining an allocation to stocks. The biggest rallies often happen without much forewarning.

Therefore, it is important to continue to focus on the long-term. Over time, stocks have consistently created more wealth than any other investment vehicle. A diversified portfolio will weather bear markets and will thrive in bull markets.

Our Strategy for the Focus List
In managing the Focus List, we treat each stock pick as an investment, not a trade. We are willing to move quickly when conditions change, but day-to-day swings in the market are not going to change our management style. Our plan is to continue to find fundamentally sound stocks with rising earnings estimates that are trading at attractive valuations.

In accordance with this objective, we will be adding ReneSola (SOL), Smith International (SII) and Sohu.com (SOHU) to the Focus List. All three stocks are trading at an attractive valuations and have rising earnings estimates.

SII provides a complete range of oilfield drilling products and services, from the rig floor to the drill bit. A sizeable portion of its business is tied to long-term projects in the Eastern Hemisphere, which historically has provided less volatile revenue streams. Smith International is also a shareholder friendly company, having both raised its dividend and repurchased stock. Zacks Equity Research analyst Sheraz Mian recently upgraded SII to a long-term buy.

SOHU is the leading Internet search engine and web portal in China. The company has been experiencing rapid growth in both revenues and earnings, but recent weakness in the Chinese stock market has made shares of this company a bargain. SOHU trades at just 18x projected 2008 earnings of $3.55 per share and is a Zacks #1 Rank ("strong buy") stock.

SOL is being added to both the Focus List and the Timely Buys List. This company manufactures solar wafers and supplies many of the major manufacturers of solar cells and modules. Unlike many other alternative energy companies, ReneSola has been profitable. Equally important, the company's earnings are projected to rise approximately 70% next year to $2.40 per share. SOL is a Zacks #1 Rank stock trading at just 5.9 projected 2008 profits.

The Focus List does not have any exposure to the industries in which these companies operate. Therefore, adding these companies will improve the diversification of the portfolio, which in turn reduces its volatility.

Regulatory and Market Events
I'm going to reiterate what I said on Zacks.com concerning the week's events and new regulatory proposals.

Traders are reacting quickly to the ever evolving events, which has included the bankruptcy of Lehman (LEH), the government takeover of AIG (AIG), the closing of a Putnam money market fund, an infusion of liquidity by several central banks and a proposal for a massive bailout of financial firms. Not to mention that short-selling has been banned on nearly 800 financial stocks here in the U.S.

In describing the week's events to David Gaffen, who writes the excellent MarketBeat blog for the Wall Street Journal, I opined, "Throughout the year there's been so many people saying this is bottom, and we hear about (the major financial firms) throwing in everything including the kitchen sink, but now we're finding they're throwing in the dishwasher, the refrigerator, and who knows what else."

Treasury Secretary Henry Paulson's and Fed Chairman Ben Bernanke's latest response to the financial crisis is the creation of a new entity that would purchase a significant amount of the distressed debt plaguing many financial firms. The assumption is that if the toxic debt can be moved off of corporate balance sheets, calm will be restored to the financial system.

Taxpayer money could be used to fund this entity, which is why the proposal is being brought before Congress. And, since this is an election year, it is highly likely that some type of bailout for homeowners at risk of defaulting on their mortgages will be included.
Rest assured, the decisions being made right now will be criticized in the future. But in a crisis situation, fast action is often better than no action. Give Bernanke and Paulson credit for being creative.
At the root of the credit crunch is a psychological problem - lenders don't trust borrowers. The entire financial system is based on the expectation that both parties engaged in a transaction that will meet their obligations. When counter-parties don't trust each other, deals don't get done and loans don't get made. It was a lack of trust that caused Bear Stearns to collapse so quickly, and it is a lack of trust that has created questions about the viability of Morgan Stanley (MS) as a stand-alone firm.

The Markets
The S&P 500, and other major averages, set new lows for the year, only to bounce right back into their previous ranges. Trading this week was not driven by technicals, but rather speculation and reaction to news events. I expect more of the same next week as we start to learn the details of the proposed bailout.

The VIX shot well above 30 this week, signaling an elevated level of fear. Recently, spikes above 30 have signaled short-term bottoms. Given the ban on short sales and the proposed bailout, it's very possible that another bottom has been set.