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A Hurry-Up Offense for the Second Half

It was an ugly first half for the stock market and now that the goal posts have been moved for the economic recovery, expect a rough game in the second half.

"I'm afraid we're not going to see [an economic] recovery until sometime in 2009 … probably well into 2009," says John Alexander, a finance professor at Clemson University, citing bank woes, energy prices and the real-estate slump for the delay.

The market had begun in the spring to reflect expectations of a brighter economy, but the buying lacked conviction and now stocks have touched bear-market territory.

"At the time these predictions for a second-half recovery were made, no one had forecast oil at $150 a barrel," said Matt Cheslock, a senior specialist at Cohen Specialists.

OPEC President Chakib Khelil went on further last week, saying oil prices could reach as high as $170 a barrel this summer.

In order for an economic recovery to occur, says Matthew Tuttle, president of Tuttle Wealth Management, it's going to require "some clarity on oil prices, what the Fed is going to do next, no new investment banks going under, and a positive trend on the economic numbers."

The market always anticipates an economic recovery, but if the economic predictions are any guide, the earliest the market would start to show glimmers of a recovery would be February 2009.

So, how do you position your portfolio in the meantime?

Top Ten S&P Performers in the First Half of 2008

Symbol
Company Name
3-Month % Change
YTD % Change
BIG Big Lots 44.35% 101.31%
NBR Nabors Industries 46.88% 81.09%
SWN Southwestern Energy 38.44% 67.41%
CHK Chesapeake Energy 38.81% 63.42%
CNX CONSOL Energy 61.80% 56.53%
X United States Steel 46.75% 53.98%
R Ryder System 14.92% 48.90%
EOG EOG Resources 7.95% 45.14%
WFT Weatherford International 34.01% 41.57%
CSX CSX 10.58% 40.97%
* as of Friday's close

"There are still opportunities to make money," says David Grenier, president of Cutler Capital Management.

Most strategists agree on two things: investors should stay away from financials and the commodities run still has further to go.

If you're going to play commodities via the stock market, solid natural gas and oil-resource companies are a good bet, says James DiGeorgia, editor of the Gold and Energy Advisor newsletter. His picks include: Occidental Petroleum, Apache, Devon Energy and Anadarko Petroleum.

Grenier's also keen on natural gas. One of his picks is Chesapeake Energy, which was one of the top 10 S&P performers in the first half and recently raised its dividend by 11 percent. Several strategists and investors say it's still got further to go.

Of course, you can take that advice to get in on the natural gas boom and play it safe – with less work – by investing in an ETF such as Invesco PowerShares Dynamic Oil & Gas Services or iShares Dow Jones U.S. Energy. Rydex and Vanguard also offer energy ETFs.

And don't forget about gold, says Marc Faber, editor of the Gloom, Boom & Doom Report. Gold has lagged the other commodities, Faber points out, so it's a pretty good investment right now.

Gold offers investors a safe haven in times of market turbulence and it's gotten a boost recently from the Fed's decision to remain on hold, which has weakened the dollar. It's now trading around $900 an ounce, after reaching $1,034 in mid-March.

Shorting the Market. Pessimism is rampant in the market but that doesn't mean you have to sit on the sidelines or sell off your entire portfolio. Some strategists say the best play for a shaky economy is to short the market, which will hedge your bets – and help you sleep at night.

Tuttle suggests that investors short everything from the dollar to Treasurys and the U.S. stock market, and put their investments in BRIC – Brazil, Russia, India and China.

One way investors can get in on the short action with minimal risk is to invest in ProShares ETFs that short the major indexes – the Dow, S&P 500 and Nasdaq -- to make some money from the market downturn. It's a pretty straightforward play: If the index loses 1 percent, you make 1 percent on the ETF that's short that index.

If you like the thrill of the hunt and want a little more risk, ProShares offers UltraShort ETFs for all three indexes, which are leveraged at about 2 times the index's decline. So, if the index drops 1 percent, you make 2 percent. Rydex also offers a 2x inverse ETF for the S&P 500.

Ten Stock Picks. While there is a bias toward shorting the market, strategists aren't giving up on stocks.

If you're buying stocks and bonds for the second half, Grenier advises a growth and income strategy. It "combines downside protection with upside potential, so it's ideal for this economy," Grenier said.

Grenier likes pharmaceutical stocks such as Pfizer, because the sector has been beaten down and has great growth potential. He also likes defense stocks including L-3 Communications.

Until the economic recovery finds its legs, Grenier suggests staying away from retail and any other consumer-oriented stocks including auto makers and hotels.

Michael Cohn, chief investment strategist at Atlantis Asset Management, also likes medical stocks, as well as media and – testing the waters – financials.

(Who will dominate 2008, the bulls or the bears? Click on the video at left.)

In the medical field, Cohn likes Novartis for its promising cancer products and other drugs in the pipeline, Teva Pharmaceuticals, which he says is one of the most efficient generic-drug makers.

In the media world, Cohn's picks include Time Warner and Disney.

He also likes General Electric, parent of CNBC, for its infrastructure business and on the assumption that its financial business will recover.

Cohn is a little more optimistic on financials than a lot of his peers.

"I think we're in the seventh inning of the credit crunch," he says, but advises caution when buying into financials at this juncture.

"Only go for the best of the best," he says.

Cohn's financial picks include JPMorgan and State Street.

And, while Wal-Mart has been the darling of this economic slump, Cohn's already looking at its more upscale rival, Target, which has taken a beating.

"Once people get beyond the doom and gloom scenario, these guys are the first to bounce," he says.

So, if you've got the stomach for it, now is a good to invest.

If you've been holding on to some cash and are itching to jump in, Cohn advises putting one-third to a half of that money to work.

When the market is volatile, convertibles, real-estate investment trusts and dividend-paying stocks are the three best investments, according to Grenier. They provide income but also have potential for growth.

And, reassess your existing portfolio.

"Sell some of the stuff that's been working and buy some of the really good stuff that's been beaten down," Cohn advises.

"It's amazing how everyone is just universally bearish right now," Cohn says. "That's when you kind of need to step up to the plate."

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