Looking for the bottom

Areas that look promising, says Mr. Wachtel, include home-building and home-building supplies, refinancing companies, healthcare, hospital chains, pharmaceutical firms, and – perhaps a surprise to a lot of investors discouraged by the market – "big blue-chip firms that should do well during a recovery. This market requires just a lot of patience," Wachtel says.

"The market continues to be very risky right now," says Martin Vostry, an analyst with Lipper Inc., in Denver.

"The future direction of stock prices is now dependent on factors outside the stock market," he says, including the possibility of war as well as continued relatively high unemployment and the possibility of a drop in consumer spending as families hunker down.

"There have been few places to hide in this market," says James Stack, who publishes InvesTech, a newsletter.

Going forward, not all indicators are gloomy. Interest rates and inflation remain low. Valuations, such as price-to-earnings ratios, are fairly good by historical measurements. The p/e ratio of companies in the Standard & Poor's 500 Index is about 17 percent, based on future earning projections, notes Joe Tigue, managing editor of "The Outlook," a financial review published by S&P.

That figure is as low as it has been in "at least a couple of decades," he says.

In addition, Standard & Poor's has revised upward its asset-allocation model for all investors to accommodate more stocks, rising from 55 percent equities last summer to 60 percent now, Mr. Tigue notes.

S&P fills out the model with 15 percent of assets in bonds and 25 percent in cash.

"I'm always optimistic" laughs Mr. Tigue, who points out that he favors long-term investing to avoid the pitfalls of overreacting to adverse market news.

"Investors should always be in the market," he insists. That way, they will be well positioned when the market does finally rebound, he says.

Still, many investors shed their stock holdings during the third quarter, often moving into fixed-income instruments. (See story, page 16 and chart, page 14.)

In doing so, they were joined by investors from abroad, who also shifted to bonds, according to the Securities Industry Association, a trade group in New York.

But bonds can have downsides. Many bonds have already rung up tidy profits, says Mr. Vostry, of Lipper. If you are not already in a solid bond fund, you may be too late, he says.

Yet Vostry still likes US Treasury bonds (for their safety and decent yields), and high-quality corporate bonds. Examples of high-grade corporates: Ford and GE.

For those still committed to stocks, be certain to shop with care, says Ackerman of Fahnestock & Co.

"Look for companies with good cash flow, a high quality of management, brand uniqueness," and a record of riding out downturns, he says.

For his own personal portfolio, Tigue buys individual stocks through dividend reinvestment (DRIP) plans, where middleman – broker – costs are eliminated or very low. "[I've] been doing that for years," he says.

For mutual-fund holdings, he recommends index funds, especially those that track the entire stock market. "Look for funds with very low expense ratios, such as through Vanguard," he says.

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