Investors shaken by the tumult in the financial industry largely heeded a critical piece of advice from analysts across the market spectrum: Don't panic.
With many of the largest investment and commercial banks tumbling through the day, most market pros are advising clients to stay the course, with careful, conservative choices meant to ride out the turbulent waves that ensued from the bankruptcy at Lehman Brothers and takeover of Merrill Lynch.
"What we have right now is maybe a purging," Vince Farrell, chief investment officer at Soleil Securities, said on CNBC. "At the end of the day there's going to be some opportunities."
"Panic is not probably the appropriate thing right now," Liz Ann Sonders, of Charles Schwab, said in the same interview.
Instead, Sonders said, investors should look toward cyclical stocks as well as health care and technology issues with companies doing business domestically, as smart plays now.
Those heavily invested in the market already should trim their positions of stocks heading higher but avoid a dollar-cost averaging strategy with financials that seeks to buy as prices fall, said Dave Rovelli, managing director of US equity trading at Boston-based Canaccord Adams. The reason: Analysts have been trying to find a bottom in financials for months and have so far failed.
"I still think if you're going to invest you pick best-of-breed in the sector and you've got to have a longer-term horizon," Rovelli said.
"If you're looking for a six-month return you could get killed."In fact, Rovelli advises against cherry-picking financials and instead buying exchange-traded funds that provide value over the long term but protect investors against sudden movements in particular stocks.
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For those looking to get in he recommends playing ETFs that track indexes containing the big financial companies, including the KBW Bank fund, which tracks the KBW Bank index, and the Financial Select Sector SPDR , a broad-based fund that invests in banking, financials, insurance and real estate.
Playing it Safe
Looking at the short term, there may be more room to run for stocks as bargain hunters take advantage of the moribund market and selloff inspired by the crumbling investment banks, said Kathy Boyle, president of Chapin Hill Advisors in New York.
Boyle thinks a 100-point bounce on the S&P 500 heading into the presidential election is possible, with a broad selloff taking over trading as the year comes to a close.
She has been advocating an aggressive portfolio of exchange-traded funds that reward investors for downward moves in various market sectors, but says most of that trade is over.
See the full analysis by Sonders and Farrell in the accompanying video
Instead, she backs a play on the Prudent Bear Fund which combines short and long moves depending on market valuations, but only as a hedge.
"You actually are going to get some bargain hunting after this washes out," she says. "Whether that is sustainable I don't know. I would be very cautious on the financials."
Elsewhere in investing, stocks that pay handsome dividends are gaining favor in the uncertain market environment.
American Express and CNBC.com-parent General Electric are two stocks that fit into that category, said Peter Miralles, president of Atlanta Wealth Consultants.
"We're seeing some dividend yields on quality companies that we probably won't see again in next decade, assuming you don't step on a landmine," Miralles says. "It's so important that if you do step on one of those landmines it's going to hurt short-term, but if you bought enough of these you'd do OK."
To be sure, long-term thinking is in vogue now as more uncertainty awaits the market, while some analysts also are telling clients to keep a bit more cash on the sidelines as events progress.
"We as a firm have been recommending that we keep 10 percent cash in their portfolios. That’s for the average investor, some people may want less, some people may want more," Scott Wren, of Wachovia Securities, said on CNBC. " You need to be getting ready for the next up-cycle in the economy; you need to be getting less defensive and more cyclical.”
Stocks Hang Tough, Fall at the Close
Investors showed little sense of panic Monday at another wave of seemingly devastating news from the financial sector--until the final hour of trading.
For most of the day, the S&P 500 defended the 1,200 level that Wall Street was watching warily, but closed slightly lower. The indexes overall were at their July lows.
The market ultimately succumbed to the avalanche of brutal news over the weekend--bankruptcyat Lehman Brothers , the takeoverof Merrill Lynch , American International Groupunder pressure to raise capital.
Watch Dennis Gartman's comments in video at left.
"In the back of a lot of people's minds this was somewhat expected, and I think this is going to be interpreted as cleaning up the house," said Kathy Boyle, president of Chapin Hill Advisors in New York. "This was the other shoe. We had to let it happen. Here it is, but now we're going to get on to business."
But Boyle, who has been predicting a sub-10,000 Dow before a recovery, sees more trouble ahead.
"The problem is this isn't the end," she says. "Yes, it gets rid of a couple of weak sisters."
"Everybody seems to be breathing a great sigh of relief," Dennis Gartman, founder of the Gartman Letter, said on CNBC. "Are we out of the woods? Far from it."