Seven Reasons Why the Bears Might Be Right

So what should you do now? It depends on what you own in your portfolio right now.

Strong Fundamentals

If I'm right, the kinds of stocks in the Dow Jones industrials -- big-company stocks, basic-materials plays, drug companies, the most solid of technology stocks -- are looking at only another 3% or so on the downside. There's no point in selling these. The damage has been done. You can't possibly time the turn precisely enough to make up for transaction costs.

So stay put in Dow Jones Industrial Average names like Johnson & Johnson(JNJ Quote), General Electric(GE Quote), 3M(MMM Quote) and Procter & Gamble(PG Quote). These stocks aren't likely to go down much further if I'm right about the extent of the market decline. And they offer great defense if I'm wrong, and we're looking at a more serious market breakdown through the October 2004 lows. If investors get scared, these are exactly the names they'll be buying to protect their portfolios.

If you're heavily into the more-volatile stocks of the Nasdaq market, I think you're looking at the possibility of a steeper decline from here, maybe as much as another 8%. Even at this late date, it makes sense to go through this part of your portfolio and sell any stocks that look particularly weak on the fundamentals. The bounce from the bottom, when it comes, won't be so strong that it lifts all stocks, both good and bad, enough to make up for taking another 8% or so loss.

That said, don't blindly sell everything with any volatility. Think a step ahead. When the market bounces, the biggest returns won't come from owning the safe big-company stocks like Johnson & Johnson, but in the small- and mid-cap parts of the market. The very stocks that have been beaten up the most are the ones most likely to bounce back highest, especially if the underlying story is fundamentally solid.