After this pain, a big rally is due

• No new trades.

Strategy Lab is MSN Money's stock-picking challenge. To learn more about the game -- and the contenders -- click here.

The severity of the recent sell-off has caught me by surprise, as my prior portfolio gain has been given back since I went from all cash to fully invested early last week.

You'd think I'd be happy in crushing the market averages by 10 full percentage points or more, but I'm in this game to make money, and I think there's plenty to be made in 2008 despite the poor start to the year.

Most of my sentiment indicators are showing the type of off-the-charts fear and outright panic that tells me we should see a big bounce soon. The main problem with these markets day-to-day is that while the bears have control, we can see more intraday volatility before the final bottom is in. But with the CBOE equity put-call ratio hitting 105% Tuesday (showing a rare signal of more puts than calls trading in a day, which we haven't seen since the mid-August 2007 major bottom) and the American Association of Individual Investors (AAII) weekly survey showing the greatest amount of net bearishness since the major market bottom in March of 2003, I'm quite confident that those with a multiweek and especially a multimonth perspective will be nicely rewarded in buying here. In fact, if this Strategy Lab round were not ending Friday, I'd likely be making a move out of my existing Nasdaq-100 exchange-traded fund (QQQQ, news, msgs) and S&P 500 ETF (SPY, news, msgs) long positions and moving into the ProShares Ultra QQQ Trust (QLD, news, msgs), which moves up (and down) twice as fast as the traditional QQQQ. I'm that bullish here, and scaling into that position with some of my own money currently.

Lessons learned

There are several lessons I learned during this contest that generally reinforce things I already know about good trading and investing, but that can be hard to execute in the real world. I always want to reinforce these lessons to get the most performance possible out of any market.

• Market timing matters: A good part of my leadership throughout most of the contest has been thanks to making some bold market timing calls to move to all cash when investor sentiment became too optimistic, and then back to fully invested when many other investors were cashing out.

• Let winners ride longer: My calls to buy shipping stocks DryShips (DRYS, news, msgs) and TBS International (TBSI, news, msgs) were among my best of the contest, but I really blew them out way to quickly for roughly 15% to 20% gains when both went on to more than 100% gains from my entry levels. Hindsight is 20/20 of course, but with a clearly defined method saying I should have held them both a lot longer, my attempt to "get cute" and trade around these positions due to the market volatility cost me meaningful additional points of performance.

• Be careful buying steep dips: I thought I really had Ceragon Networks (CRNT, news, msgs) pegged after I bailed at $20.50 a share for a 50% gain, and then bought back in after a 20% dip, but often if the dip is too steep, it just takes too much momentum out of the stock, and that happened here.

• Consider more bearish ideas: One of the true mental traps we all fall into is seeing a multiyear bull (or bear) market and thinking we should always stay on the same side of that longer-term trend. Meanwhile, financial stocks were collapsing, my systems were picking them up, but I was simply too wary of shorting in the contest.

• Focus: Frankly, with all my other responsibilities (running stock and options recommendation services, doing weekly coaching for several small groups of traders, developing new Web site and DVD content and much more), I didn't have the focus I should have had in the contest on the other new hot sectors (primarily solar) that were blooming late in 2007.

That's why I'm penning this final piece, as I plan to keep refining my focus back to the areas in my business and my trading that give me the biggest results. I want to give a big thanks to the entire crew at MSN Money for putting on this consistently engaging contest, which got even better thanks to the recently added Strategy Lab Open. I encourage you to get involved in the Open in the upcoming round, as it's a great way to learn what works for you and gives you a chance to compete against fellow investors. And I hope you'll drop me an e-mail sometime at price@bigtrends.com if you ever have any questions on my BigTrends market-beating approach.