Revisiting the Recession Playbook

Editor's note: This column was originally published on RealMoney on Jan. 23, 2008 at 9:27 a.m. EDT. It's being republished as a bonus for TheStreet.com readers. It is a follow-up to Roger Nusbaum's column "Recession-Proof Your Portfolio," published last September. For more information about subscribing to RealMoney, please click here.

For most of 2007 in some of my writing both for TheStreet.com and my blog I have been expressing my opinion that the current bull market /expansion would be coming to end. This was based on two things primarily; the abnormally shaped yield curve and the length of the bull market. In fact I think the high from October will be the high for the cycle .

In an article from Sept. 10, I went sector by sector talking about which ones are better to overweight and which ones are better to underweight for anyone who does think a bear market is coming.

I revisit this now because more people are open to the possibility that a bear is here or coming imminently, although the market is transitioning from down a little to down a lot, it's still not too late. (This is how bear markets start; the roll over slowly over a period of months giving you plenty of time to take defensive action)

Get Ready for a Recession -- Diversify

Going sector by sector you will see, as was the case four months ago, that most of this is rule of thumb and does not require much analytical skill. The table at the end of this column shows the changes in the sectors' weighting in the S&P 500 since Sept. 10.

Financials: Back in September I said to be underweight this sector (actually I have been saying this for many months before September). We all know what has been going on there for months. I believe this is likely to continue until the yield curve normalizes. The dynamic at work is that when the curve, I mean the entire curve, is not normally sloped it makes lending money less profitable. This could result in a couple of things but what we have seen unfold is that banks took more risk in the loans they made. I would wait until the curve normalizes again before increasing exposure because the risk and the consequences of that risk is still being quantified and the curve is still not right.