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Market Outlook: Stocks Could See More Downside Before Rebounding

Thursday's selloff in stocks is expected to continue over the short term, but analysts say investors can take advantage of the drop in anticipation of an eventual rebound.

"It looks like we're on a big rollercoaster ride and trending lower short-term," Frederic Dickson, chief market strategist at D.A. Davidson, told CNBC.com. "I don't see this as a start of a 20% bear market, but I think 13,000 will be coming back into investors' thoughts. I think that we'll be trading in the 13,000 to 14,000 range for a couple of months."

Thursday's sharp decline was sparked by concerns about weak housing, financing for corporate deals, higher oil and unwinding of the Japanese carry trade, a popular financing tool for hedge funds.

"I think we have real systemic financial problems," said Michael Metz, chief investment strategist at Oppenheimer. "The leverage is in hedge funds and institutions that buy things on credit. I think it's going to take a while before it's all accomodated. I'm expecting the market to go down some more short term before setting itself up for a rally. But, frankly, I think we saw the highs of the year when the Dow hit 14,000."

"This is very similar to me to what happened in February," said Michael Cuggino, portfolio manager at Permanent Portfolio Funds. "The market is swinging all over the place and you're seeing a lot of negative information coming to a head. I think all of this is hitting at once and that's why you're seeing an abrupt decline. But I think we end the year higher from where we are here."

Finding Opportunity in Volatility

Some analysts see the current volatilty as an opportunity for investors to put new money to work in the right sectors.

"I think what you are going to see is the losses from these mortgage-backed securities and CDOs could approach $200 to $300 billion and that's going to create fear," said Ken Heebner, portfolio manager of the CMG Focus Fund. "But at the same time, it's not going to derail the tremendous growth in the global economy."

Heebner likes oil services giant Schlumberger . "This is a company that's growing 25-30% for the next several years, independent of what happens to the economy, selling at 17 times earnings," said Heebner. "It's a bargain."

"Days like these present good buying opportunities," said Cuggino. "Sure you can wait and see if there's more room to fall, but stocks were not outrageously expensive before this. So, if the market corrects, that makes them even more attractive. I would be looking for sectors that have corrected more than the broader market like financial services, REITs, some selective tech shares, pharmaceuticals and biotechnology."

Walter Todd, a money manager at Greenwood Capital, likes large caps with international exposure such as IBM , Pepsi and Colgate-Palmolive . "People are going to pay a premium for growth in the earnings because, in the overall market, earnings are slowing down," said Todd. "So you have to look at sectors that have exposure to the rest of the world. That's healthcare, consumer staples, some technology stocks and industrials as well."

Avoid Bottom-Guessing

Even though many analysts believe stocks could consolidate further, they say trying to guess when the bottom will occur is tricky business.

"I think picking the bottom is a fool's game," said Christopher Smart, director of international investments at Pioneer Investments. "What experience has shown is that we'll have a few more weeks perhaps of this kind of volatility. We look out and see the growth in China, Brazil and South Africa. Those are good stories that will be hurt in the short term, but fundamentals remain very strong."

Barry James, portfolio manager at James Advantage Funds, believes value stocks will probably hold up better if the market goes through a volatile, corrective period. "Right now, it's not a matter of how much can you make, it's how much can you keep. We'd look for companies that are buying back shares, where there's not huge expectations in terms of savings."

D.A. Davidson's Dickson has no problem with just riding the market out in the short term. "Essentially, just sit on the sidelines for the moment," said Dickson. "Aggressively lighten up on U.S. companies with broad-based consumer exposure. Look at international exchange-traded funds. They will probably bounce back a little faster when we turn around."

Phyllis Burke Goffney is a news editor at CNBC.com. She can be reached at phyllis.goffney@nbcuni.com.

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