Last week I made the somewhat surprising observation that we were in the midst of a new bull market. The Nasdaq Composite was on the brink of 1645, which represented a 25% rise from its low of Nov. 20. This is also a Common Sense selling threshold. That same day, Jan. 6, it broke through, closing at 1652.

For followers of the Common Sense system of buying lower and selling higher, this represented one of those occasions to sell higher. (The system calls for buying stocks at thresholds of 10% declines, and selling on 25% increases. I use the Nasdaq Composite as my measure; the thresholds are derived from the fact that since 1979, average rallies have been 50%; average declines 20%. My thresholds are half of each.) Over the years, in good times and bad, this system has imposed an effective discipline at selling into rallies and buying into declines.

The system certainly proved effective last week. The selling opportunity the period when the Nasdaq was above 1645 lasted all of a few hours. The next day, the Nasdaq dropped below the threshold immediately and pretty much continued straight down. By this week, as the brief New Year s euphoria passed and the grim economic news reasserted itself, it was more than 100 points lower. Anyone who was adroit enough to sell is now sitting on some cash that can be redeployed at much lower levels.

New Buy and Sell Thresholds

Mr. Common Sense, however, isn t among them. I ve said many times that I write this column for people like me, busy with other jobs and activities, not professional investors. That was the case for me last Tuesday afternoon. I figured, erroneously, that I d have time to sell something the next day. No Common Sense system worth its name can depend on split-second timing. So what if I missed a threshold? It s happened before, and new opportunities always arise eventually.

Nonetheless, the incontrovertible fact that a 25% rally has intervened in what was a long-running bear market requires re-calibrating the Common Sense thresholds. The old 10% declines were measured from a Nasdaq that peaked near 2750, so those intervals were a substantial 275 points. The new Nasdaq peak is near 1650 (I always round off) so the new buying intervals are just 165 points. That means the next buying opportunity 1485 isn t that far away, and the one after that will be 1320. Under the old calibration, the next buying threshold was 1300.

Of course, there s nothing forcing you to slavishly follow this methodology. If, like me, you failed to raise cash last week, you can simply stick with the old system, ignore this 25% rally, and put more money into stocks if the Nasdaq hits 1300. If you have some cash on hand, and want to put it to work sooner, adopt the new thresholds (as I plan to). Either way, you ll be buying lower, which is the essence of Common Sense.

How Bad Will 2009 Get?

In case you didn t even notice the late 2008-early 2009 rally, you re hardly alone. I don t know anyone who felt like celebrating the Nasdaq at 1645. The outlook for 2009 is grim, the only question being: How bad will it be?

Ordinarily at this time of year, Common Sense looks at the conventional wisdom for the coming year. The goal is to figure out if there s money to be made by swimming against the tide, the theory being that the conventional wisdom is already baked into stock and other asset prices. But after the experience of 2008, when all the conventional wisdom proved wildly off base, there s very little conventional wisdom out there. The one thing almost everyone seems to agree on is that 2009 will be terrible from an economic perspective.

After last year s steep declines (and the recent rally notwithstanding), a bleak view is surely baked into stock and other asset prices. So the question is whether reality will prove far worse than even this pessimistic consensus, or somewhat better.

I prefer the more optimistic view, in part because it would give me little or no pleasure to capitalize on economic catastrophe. But that doesn t mean I have the benefit of a crystal ball. As I have throughout the past year, I recommend a disciplined, long-term approach that rests on faith in the continued ingenuity and productivity of the American and global work force.